Econ117_Top-2

# Econ117_Top-2 - Ec 117 GROWTH THEORY Foster UCSD LECTURE...

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LECTURE NOTES Foster, UCSD 1-Jul-09 TOPIC 2 – SIMPLE CONSUMPTION GROWTH MODELS A. Robinson Crusoe Model: Consumption with Fixed Population 1. The Key Tradeoff – Current vs. Future Consumption: a) Imagine an economy which produces two goods with a fixed endowment of resources (land, labor and capital) and a given production technology. Food represents consumption goods and the current standard of living. Machines represents capital goods production (capital investment) b) Economic growth shows up as an outward expansion of the PPC. c) Sources of growth. 2) More labor – birth rate, immigration, labor force participation rates 3) More physical capital equipment. Requires a sacrifice of current consumption! Compare green and red curve shifts above – USSR after 1917 2. The Robinson Crusoe Model: a) Setting. 1) Crusoe is marooned on an island and is unable to produce anything. Output Q(t) = 0 and Q’(t) ≡ 0 He is the only person. N(t) = 1; N’(t) ≡ 0 2) He finds a patch of mushrooms growing on the island. The size of the patch at time t is denoted M(t). This is a stock, measured in square feet of mushrooms, at any point in time. The patch is growing naturally at g[M(t)]. This is the absolute rate of change of the stock of mushrooms if no harvesting takes place, measured in additional square feet of mushrooms per year. (NOT proportional rate of growth in %!) b) The issues. 1) How fast can Robinson harvest and consume mushrooms? That is, what material standard of living can he achieve over a long (infinite) period of time? The cropping or consumption rate is denoted C(t), measured in square feet of mushrooms used up per year. Notation (Crusoe)

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Econ117_Top-2 - Ec 117 GROWTH THEORY Foster UCSD LECTURE...

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