Chapter 7

Chapter 7 - Kimberly Zhang Chapter 7 Solow Growth Model o o...

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Kimberly Zhang Chapter 7 Solow Growth Model o If the savings rate is high, the economy will have a large capital stock and a high level of output o If the savings rate is low, the economy will have a small capital stock and a low level of output Supply of Goods and the Production Function o Y = F(K, L) o Y/L = F(K/L, 1) amount of output per worker (Y/L) is a function of the amount of capital per worker (K/L) y = f( k ) where f( k ) = F( k ,1) MPK = f( k + 1) – f( k ) Production function exhibits diminishing marginal product of capital Demand for Goods and Consumption Function o Demand comes from consumption and investment o y = c + i (national income accounts identity, omitting government purchases and assuming a closed economy) o s = savings rate, 1 – s = consumption c = (1 – s)y Replace into identity y = (1 – s)y + i i = sy Growth in the Capital Stock and the Steady State o Investment: expenditure on new plant and equipment o Depreciation: wearing out of old capital; causes capital stock to fall
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This note was uploaded on 09/13/2009 for the course 220 204 taught by Professor Clare during the Spring '08 term at Rutgers.

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Chapter 7 - Kimberly Zhang Chapter 7 Solow Growth Model o o...

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