Lec 8 Economic growth model.ppt

Lec 8 Economic growth model.ppt - Economic growth...

• 31

This preview shows pages 1–9. Sign up to view the full content.

Lecture 8 Mentor: Pham Xuan Truong [email protected] Economic growth model (Solow model)

This preview has intentionally blurred sections. Sign up to view the full version.

Content I Assumption of the Solow model II Building Solow model in basic mode III Model with changes in population growth and technological progress IV Economic growth policy recommendations
I Assumption of the Solow model The Solow Growth Model is designed to show how growth in the capital stock, growth in the labor force, and advances in technology interact in an economy, and how they affect a nation’s total output of goods and services.

This preview has intentionally blurred sections. Sign up to view the full version.

Solow model based on several assumptions + The economy produces one type of goods by using 2 inputs capital (K) and labor (L), total output is denoted by Y + Production function followed the form of constant return Cobb – Douglas Y = A. K . L 1- ; (0 < <1) + MPK and MPL diminish as K and L increases + The whole population is labor force. In simple mode, L and T are assumed to be fixed (part II). The assumption will be gradually relaxed (part III) + Closed economy with total saving from domestic market + Perfect competition market, firms earn normal profit I Assumption of the Solow model
II Building Solow model in basic mode Good market supply We begin with a production function and assume constant returns. Y=F(K,L) so z Y=F( z K, z L) By setting z =1/L we create a per worker function. Y/L=F(K/L,1) So, output per worker is a function of capital per worker. We write this as, y=f(k)

This preview has intentionally blurred sections. Sign up to view the full version.

II Building Solow model in basic mode The slope of this function is the marginal product of capital per worker. MPK = f(k+1)–f(k) k y Change in y Change in k y=f(k) k in change y in change MPK It tells us the change in output per worker that results when we increase the capital per worker by one . Good market supply
consumption per worker per worker depends depends on savings savings rate rate (between 0 and 1) (between 0 and 1) Output Output per worker per worker consumption consumption per worker per worker investment investment per worker per worker y = c + i y = c + i 1) c = c = (1- (1- s s ) ) y y c = c = (1- (1- s s ) ) y y 2) y y = (1- = (1- s s ) ) y y + i + i y y = (1- = (1- s s ) ) y y + i + i 3) 4) i = i = s s y y i = i = s s y y Investment = savings . The rate of saving s is the fraction of output devoted to investment. II Building Solow model in basic mode Demand for goods and consumption function

This preview has intentionally blurred sections. Sign up to view the full version.

Growth in the capital stock and the steady state Two forces that influence the capital stock: + Investment: expenditure on plant and equipment. + Depreciation: wearing out of old capital; causes capital stock to fall. Recall investment per worker i = s y . Let’s substitute the production function for y, we can express investment per worker as a function of the capital stock per worker: i = sf(k) This equation relates the existing stock of capital k to the accumulation of new capital i.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern