II.D. - steady state (ii) growth rates decline as the...

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II. D. Transitional Growth 1. Growth Predictions Now we use the key equations of the Solow model to discuss the nature of economic growth via capital accumulation (3.16) Assuming a Cobb Douglas technology () the growth equation becomes (3.16*) Note in (3.16*) that as k increases the average product of capital declines. See also Figure 3.9. This is because of diminishing marginal productivity (as capital increases relative to employment). With this in mind we can sketch (3.16) in Figure 3.10. Sketching the capital stock over time is given by Figure 3.11. In summary, we have the following properties of transitional growth (i) growth rates are faster the farther away the economy is from the
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Unformatted text preview: steady state (ii) growth rates decline as the economy develops (iii) growth rates become zero in the steady state Note that these properties imply that poor countries should growth faster and catch-up to rich countriesa prediction known as conditional convergence . The conditional is added because the prediction only holds if countries have similar steady stateswhich means similar s , A , and n . To see this, draw (3,16) for two countries on the same graph where the countries have different values of s , A , or n . 2. Testing the Predictions Figures 4.9-4.11...
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This note was uploaded on 02/19/2011 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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II.D. - steady state (ii) growth rates decline as the...

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