EC 321 Final Study Sheet

# EC 321 Final Study Sheet - EC 321 Final Study Sheet...

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Unformatted text preview: EC 321 Final Study Sheet Harod-Domar Model Y=output K=quantity of capital L=quantity of Labor v=K/Y (some technical parameter) g=growth s=% of national income saved d=depreciation rate Y= f(K,L) Y= K/v = K/(K/Y) = K * (Y/K) Ex) if v=5 you need 500K for each 100 units of Y If v is constant : v=K/Y and v= ∆K/∆Y ∆K/∆Y: Incremental Capital Output Ratio (ICOR) What v tells us: Capital intensity (relative to use of labor), in the LR as countries develop v tends to ↑ Derivation of H/D Model: Y= K/v where v=K/Y ∆Y= ∆ K/v but ∆K= I – dK (s=I) so ∆K = s-dK (s=sY) so ∆K=sY-dK ∆Y= (sY-dK)/v ∆Y/Y = (sY-dK)/Yv ∆Y/Y = (s-d(K/Y))/v ∆Y/Y= s/v – d ∆Y/Y = g so g= s/v – d g ↑ : s↑ d↓ v ↓ • Must compare countries at same level of development • d depends on industries • v & d are technical parameters (can’t do much to control them) • s is a behavioral parameter (more policy) • Pretty simple • Based on fixed proportions • Assumes that K is the limiting input • Capital fundamentalism (Nurkse, Harod-Domar) • Used by World Bank and other institutions to calculate “financing gaps” between amount of available saving and the amount of investment needed to achieve a target growth rate. 2 Major uses : 1) To predict growth rate g= (s/v) – d where g=growth, s=% of national income saved, v=capital output ratio (K/Y), d=depreciation rate ex) s=.15, d=.02, v=3 g=(.15/3)-.02 = .03 3% • G tends to be higher when s is high, v is low, or d is low. Capital is the limiting factor for growth Why predict the Growth Rate?- When high rate is expected, sounds good to outsiders, perceptions are - Higher growth generally more jobs- Compare to other countries- Help predict government revenues 2) Calculate savings rate necessary for some target growth rate (aka calculating capital requirements) s=(g+d)v Ex)g=.04 d=.02 v=4 s= (.04+.02)4 s=.24 24% Strengths 1)simplicity 2)focus on key role of saving 3)reasonably accurate from one year to the next (in the absence of shocks) Weaknesses : 1)rigid assumptions of fixed K/L, K/Y, and L/Y. Capital, labor, and output must all grow @ same rate, which is unlikely. 2) model increasingly inaccurate over time. Economy changes v: v now +recent past ≠v future 3)absence of any role for technological change, which plays a critical role in long term G+D by contributing to increased productivity of all factors of production. 4) looks at Y not Y/L (linked to ↑ in SOL) Solow Model 1) Allows variable proportions (K/L can change) 2) Looks at output per unit of labor: Y/L not just Y (linked to SOL) 3) Looks at L and K 4) Brings in technology 5) Led to other research: sources of growth, convergence Production Function: Y/L = A(t) f(K/L) A= level of technology t= function of time f(K/L): function of capital/worker • Says that even if tech stays the same Y/L would change if K/L changes Graph • Positive slope that becomes flatter because: diminishing returns, output per worker rises...
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## This test prep was uploaded on 04/21/2008 for the course EC 321 taught by Professor Kuntz during the Fall '08 term at Bentley.

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EC 321 Final Study Sheet - EC 321 Final Study Sheet...

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