# 2010_RL2 - EC 210 Revision Lectures Milan Lisicky...

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EC 210 Revision Lectures Milan Lisicky [email protected] April 28, 2010 1/35

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1 Solow models Solow model with technological growth Critical Evaluation 2 models of endogeneous growth overview learning by doing model human capital model 3 Consumption theory ricardian equivalence two period model 4 Investment two period model tobin’s q 2/35
Solow model with technological progress motivation and key aspects sustained growth of living standards can be explained by technological progress that is labour-augmenting ( not capital-augm.or TFP) key factors of production: eﬀective units of labour A N , capital K formulas population growth rate N 0 N = 1 + n growth rate of technology A 0 A = 1 + g neoclassical production function Y = F ( K , A N ) = K α ( A N ) 1 - α market clearing Y = C + I investment, consumption I = s Y , C = (1 - s ) Y capital accumulation K 0 = (1 - d ) K + I 3/35

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formulas in per eﬀective-worker terms y e = f ( k e ) = k α e ) k 0 e = (1 - d ) ke 1+ n + g + s f ( ke ) 1+ n + g i e = s y e k 0 e (1 + n + g ) = (1 - d ) k e + i e diminishing MPK implies unique and stable steady-state in k e how to compute steady state: k * e (1 + n + g ) = (1 - d ) k * e + s f ( k * e ) k * e ( n + g + d ) = s f ( k * e ) 4/35
implications - long run (steady state) y * e = f ( k * e ) (1) const. output per eﬀective worker i * e = s y * e , c * e = (1 - s ) y * e (2) constant i e and c e x * e = X * AN = X * N = Ax * e (3) variables per capita grow by g % (4, 5) conditional convergence and golden-rule as before implications - short run dynamics by following the same steps as before, we can solve for (1 + n + g ) g ke = s 1 k 1 - α e - ( d + n + g ) 5/35

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Sample Paper Q2 There is a concern that the increase in the price of oil may slow down economic growth. Use the Solow model to explain the growth eﬀects of an increase in oil price. Answer : Obviously, there is no oil in the Solow model. Out of the parameters there are (s, d, z, g) it is least crazy to capture the oil shock as a decrease in z - a negative productivity shock. To do so we don’t need to complicate things by assuming population or productivity growth so let’s keep n = g = 0 In principle, we can talk about short- and long-run eﬀects on growth: Long-run growth of aggregate output is given only by n = g = 0. Therefore there are no long-run implications on the growth rate. 6/35
Short-run eﬀects : Simple Solow model k 0 = (1 - d ) k + i = (1 - d ) k + s z f ( k ) d k * = s z f ( k * ) lower z generates a period of negative growth Solow model with tech. progress NB that ﬁgure is cast in terms of k e = K AN lower A moves k e to a higher point Slower growth follows as we converge back to k * e 7/35

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Critical Evaluation extremely simple and incredibly useful for modeling growth experience of a single country (or of equally developed countries). all modern
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## This note was uploaded on 09/12/2010 for the course PHYS 15289 taught by Professor Oreilly during the Spring '09 term at Aberystwyth University.

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2010_RL2 - EC 210 Revision Lectures Milan Lisicky...

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