slide 2Does the saving rate affect growth?If the production function exhibits decreasing returns to capital, an increase in the saving rate can only affect the growth rate temporarily. In the long run, saving does not affect growth, but does affect the level of output per worker.Why does the answer to the above question matter?Many macroeconomists are concerned about the low U.S. saving rate and the large scale of U.S. borrowing abroad. Changes in the structure of the Social Security system may also have implications for saving and capital accumulation.Only technological progress has long-run growth effect, which is not covered by the simple Solow model introduced in Chapter 10.NZ’s saving rate is among the lowest of OECD countries. The KiwiSaverlegislation may help redress this problem.
slide 3Key Tools, Concepts, and AssumptionsTools and conceptsCh 11 develops the Solow modelof growth for the case of no technological change and no population growth. The golden-rulelevel of capitalper worker is the value of capital per worker that maximizes steady-state consumption per worker.Ch 11 proposes the Cobb-Douglasproduction function (See Appendix on page 259)Assumptions: a closed economy, a fixed labour force, and a fixed level of technology.The C-B production function has constant returns to scale. (See slide 9).International trade/capital flows have only the short-run or the medium-run impacts on an economy. Growth is a long-run issue.
slide 4The steady stateInvestment and depreciation Capital per worker, kK/Nsf(Kt/N)Kt/Nk*Steady-state value of kor K/NDepreciation per workerInvestment per workerkKt+1/N-Kt/N=sf(Kt/N)Kt/NWhensf(Kt/N)=Kt/N,kKt+1/N - Kt/N= 0, so Kt+1/N = Kt/N = K*/N = k* for all t.