Section+1 - Section 1 Econ 111B, WQ10 TA Rivka Shenhav...

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Econ 111B, WQ10 TA Rivka Shenhav rshenhav@ucdavis.edu Office: SS 123 Office hours: TR 1-2pm 1 Section 1
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Moto 2 The Timid Cannot Learn and the Short Tempered cannot teach
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Solow Growth Model The Basics 3 Start w/ the National Accounts in a closed economy, ognoring governement spending: Y = C+I Y National Income = National Output (GDP) C Aggregate Consumption I Aggregate Investment Or: I = S = Y-C = sY S National Savings s Savings rate
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Solow Growth Model The Basics 4 The National Savings are invested in increasing the National Capital Stock, K But, due to depreciation at a rate of d , the capital stock declines by d K every year The net annual change to K: Remembering that the national output is: Y=f(K,AL), a change in the capital stock translates into a change in national income K sY K d
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Solow Growth Model 5 Labor work force L grows at a rate of n Technology A grows at a rate of g The effective workforce: AL Grows at a rate: n+g Income per effective worker: y = Y/AL Capital stock per worker: k = K/AL Annual increase in k: sy Annual decrease in k: d k + (n+g)k Net annual change: k g n sy k ) ( d
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The Long Run Steady State 6 In the LR, with no changes to any of the exogenous parameters(s, d , n, g) capital stock per effective worker converges to a fixed value and does not change: The steady state value: Note: k* depends only on the exogenous parameters! Since k* is fixed so is the output per effective worker! k g n sy k ) ( 0 d ) ( * * * k f g n s y g n s k
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With Cobb-Douglas Production Function 7 Assume that we are working with labor augmenting Cobb- Douglas production function: Y=K a (AL) 1- a Output per effective worker is then: y= Y/AL=K a (AL) 1- a /AL = (K/AL) a = k a =f(k) The steady state value: a d 1 1 * * * * ) ( g n s k Hence k g n s k f g n s k
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Steady State Determination in Solow 8
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Income Per Capita (IPC) Growth 9 In the LR, the IPC: IPC Grows at a rate: * * ~ Ay y g g y A y 0 * ˆ ˆ * ˆ ~
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PS1 Q1 10 From on campus network Go to http://hsus.cambridge.org/HSUSWeb/HSUSEntryServlet
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Section+1 - Section 1 Econ 111B, WQ10 TA Rivka Shenhav...

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