Class notes for chapter 7.docx - Class note for Chapter 7 Capital accumulation and population growth1 In this chapter we will learn ▪ the closed

# Class notes for chapter 7.docx - Class note for Chapter 7...

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Class note for Chapter 7. Capital accumulation and population growth 1 In this chapter, we will learn the closed economy Solow model how a country’s standard of living depends on its saving and population growth rates how to use the “Golden Rule” to find the optimal saving rate and capital stock Why growth theory matters Economic growth raises living standards and reduces poverty. Understand why poor countries are poor Help design policies that can help them grow 1. The Solow model due to Robert Solow, won Nobel Prize for contributions to the study of economic growth a major paradigm: widely used in policy making benchmark against which most recent growth theories are compared looks at the determinants of economic growth and the standard of living in the long run How Solow model is different from classical models 1. K is no longer fixed: investment causes it to grow, depreciation causes it to shrink 2. L is no longer fixed: population growth causes it to grow 3. no G or T (only to simplify presentation; we can still do fiscal policy experiments) 1 The class note should be used only by students in ECON2102A in Fall 2018. 1

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f(k) is the “per worker production function,” it shows how much output one worker could produce us- ing k units of capital. 2
The consumption function (per worker) : c = (1– s ) y where s = the saving rate, the fraction of income that is saved ( s is an exogenous parameter) Note: s is the only lowercase variable that is not equal to its uppercase version divided by L Saving and investment saving (per worker) = y c = y (1– s ) y = sy National income identity is y = c + i Rearrange to get: i = y c = sy (investment = saving , like in chap. 3!) Using the results above, i = sy = sf(k) The real interest rate r does not appear explicitly in any of the Solow model’s equations. This is to sim- plify the presentation. investment still depends on r , which adjusts behind the scenes to keep invest- ment = saving at all times. We can show the relationships of output, consumption, and investment in a single chart 3

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Depreciation: δ (delta) is the rate of depreciation 4
5

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As shown in the chart below, the intersection of investment curve and capital depreciation curve deter- mine the steady state capital stock.
• Fall '09
• DEMERS
• Economics, Chapter 7 , Lecture Notes, Capital accumulation, Solow

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