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Unformatted text preview: Economics 100B Professor Steven Wood 1/30/07 Lecture 5 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course Announcements My office at Haas has changed. It is now F526. Problem set 2 and next weeks lecture note outlines have been posted. The last 4 exams have also been posted. Use them to practice for the midterm. Lecture Solow Growth Model There are three components to this model: The Production Function The Savings Function The Balanced Investment Function These all yield us the Solow Growth Model. We will learn about the steady-state and how the economy adjusts when it is not in equilibrium. The Production Function Y/N = A* f(K/N) Remember, production is linked to technology and capital per worker. Graph of the production function. Remember, output per capita increases as capital per capita increases. Diminishing returns reduce this effect however causing increases in Y/N to be smaller and smaller. Y/N K/N Y/N=A*f(K/N) Savings Function S=v*Y The nations saving rate is represented by v. This tells us what fraction of our income we are saving. 1 v . Savings between countries vary considerably. The US Savings rate is about 10% while Chinas is about 40%. They can change over time. V=S/Y S=Sp+Sg+Sf (Private, Government, Foreign Savings) We want to transform S=v*Y by dividing by N. ASUC Lecture Notes Online Economics 100B 1/30/07 Sharing or copying these notes is illegal and could end note taking for this course 2 ) ( = = N K f A v N Y v N S Because both functions have capital per worker and output per worker, we can draw them in the same space as we have done before. Remember: Savings is how we finance actual investment (Ia). S=Ia. This also means if we divide by N we will have S/N = Ia/N. This is an identity. It is always true. Whenever we are talking about savings we are talking about actual investment. Graph of Production and Saving Functions The rate of savings (v) tells us where the function actually lies on our graph. More savings, the line is higher. Less savings, the line is lower. Graph of Increase in Savings Rate You can see that an increase in savings rate raises our savings function up. The source of the change in savings rates does not matter, just the overall rate of savings....
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- Spring '04