lecture 202-06

lecture 202-06 - Fall Semester '05-'06 Akila Weerapana...

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Fall Semester ’05-’06 Akila Weerapana Lecture 6: Assessing the Basic Solow Model I. OVERVIEW In the last class we looked at a couple of comparative statics exercises. The first was the impact of a change in the saving rate on capital and output in the economy. We showed that the change in the saving rate did not have a long run impact on the growth rate of output. However, there was a short run increase in the growth rate, and as a result the economy reached a higher level of steady state output. A change in the saving rate is therefore said to have a level effect on output but NOT have a growth effect ; i.e. it affects the steady state level of output but not the long run growth rate of output. The second was the impact of a change in the population growth rate on capital and output in the economy. We showed that the change in the population growth rate, while raising both the level and the growth rate of total output in the economy, left the level of per-capita output lower than it would have been in the absence of the increased population growth. Today’s class looks at some of the mathematical properties of the steady state to understand how economic changes affect the endogenous variables of the model. II. COMPARING STEADY STATES USING ALGEBRA In economics, we typically use calculus to do comparative statics exercises. Given an economic model, we would solve for the endogenous variables as functions of the exogenous variables and the parameters, then take derivatives (or partial derivatives) to show how the endogenous variable will change when an exogenous variable or a parameter changes. However, thus far with the Solow model we have used diagrams instead of calculus to perform
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This note was uploaded on 03/08/2011 for the course ECON 602 taught by Professor Chugh during the Spring '11 term at Johns Hopkins.

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lecture 202-06 - Fall Semester '05-'06 Akila Weerapana...

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