L5_Solow - Growth Models Take II Solow 13 2010 ARE/ECN 115A...

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4/14/2010 1 Growth Models, Take II: Solow April 13 2010 April 13, 2010 ARE/ECN 115A Business This week: Finish Classical Growth Models Today: Solow without technological change Thursday: Solow with technological change and wrap-up of classical growth models Readings PRL: 103 – 134 Next Tuesday: Two Sector Models PRL 134 147 (Two Sector Models PRL 134-147 (Two-Sector Models) Sections this week: In-depth look at Solow I and Solow II See me after lecture if your name is: Thomas Fay, Sarah Krane, Mischa Galitzen-Weiss, Leticia Cheng.
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4/14/2010 2 Summary of Harrod-Domar Technology Fixed-coefficient (Leontief) production function Fixed coefficient (Leontief) production function Constant Returns to scale Implication for production functions Aggregate production function is: Y = (1/v)*K v is ICOR (What is that??) Per-capita production function is: y = (1/v)*k… (since Y/L = (1/v)*K/L) Constant ICOR implies that sustained growth is possible via accumulating capital Growth rates: g = s/v – d ( Aggregate income) g * s/v – d – n (Per-capita income) As long as economy is on or below “expansion path”, sustained growth is possible via accumulating capital (machines). Significance of being below expansion path Significance of being below expansion path? Labor is unemployed; Lack of capital is the constraint to growth & development; Made perfect sense in 1930’s…Great Depression! Brings us to…
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4/14/2010 3 Solow’s Surprise Robert Solow writes 2 articles in 1956 and 1957 “Contributions to the theory of Economic Growth” Let’s start with the punch-line… What is Solow’s Surprise? An increase in the savings rate will raise the long run level of income per capita but; An increase in the savings rate will not raise the long run growth rate of income. In the absence of technological change, there can be no long run growth ! In his own words… Solow’s Nobel Acceptance Speech (1987)
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4/14/2010 4 Problem 1: “Knife-Edge” “…in the 1950’s I was following a trail that had been marked out by Roy Harrod and Evsey Domar……Actually, I was trying to track down and relieve a certain discomfort that I felt with their work discomfort that I felt with their work. Harrod and Domar seemed to be answering a straightforward question: when is an economy capable of steady growth at a constant rate? They arrived…at a classically simple answer: the national saving rate has to be equal to the product of the capital-output ratio and the rate of growth of the labor force…Then and only then could the economy keep its stock of plant and equipment in balance with its supply of labor, so that steady growth could go on without labor shortage on one side or labor surplus and growing unemployment on the other side. This discomfort arose because of their assumption that all three of the key
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This note was uploaded on 04/20/2010 for the course ECN 115A 115A taught by Professor Boucher during the Spring '10 term at UC Davis.

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L5_Solow - Growth Models Take II Solow 13 2010 ARE/ECN 115A...

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