R_PART III - Part III A Uni.ed Approach In this book we...

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Part III In this book we have voluntarily presented the theory of economic growth along the lines it followed in the 20 th century: in Part I, we considered positive, or descriptive growth theory. Assumptions were made about the functioning of the economy (income was generated through a production function); the savings rates s of population. In Part II, we discussed the normative approach, whereby society chooses a savings rate so as to meet a long-term objective such as the maximization of welfare over a long horizon. This was the heart of optimal growth theory. We will now show, in the third part of this book, that both approaches can, and should, be uni&ed. If, as Robert Solow pointed out in his path- breaking essay, we are in a competitive economy, the wage rate of capital and the real rental are determined by the traditional marginal productivity equations. We underline the second relationship, namely the equality be- tween the real rental rate and the marginal productivity of capital, because, as we will show, it determines a savings rate leading to an optimal, dynamic, allocation of capital. Thus, the 1956 essay by Robert Solow is a major landmark not only because it freed the theory of rigid production constraints adopted in the th century±s literature, but also because it carries all the seeds of
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This note was uploaded on 06/16/2010 for the course MS&E 249 taught by Professor Olivierdelagrandville during the Fall '08 term at Stanford.

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R_PART III - Part III A Uni.ed Approach In this book we...

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