growth2 - Part IIB. Paper 2 Michaelmas Term 2010 Economic...

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Part IIB. Paper 2 Michaelmas Term 2010 Economic Growth Lecture 2: Neo-Classical Growth Model Dr. Tiago Cavalcanti
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Readings and Refs Original Articles: Solow R. (1956) ‘A contribution to the theory of economic growth’ Quarterly Journal of Economics , 70 , 65-94. Solow R. (1957) ‘Technical change and the aggregate production function’ Review of Economics and Statistics, 39 , 312-320. Swan T. (1956) ‘Economic growth and capital accumulation’ Economic Record , 32 , 334-361. Main Text: (*)Jones ch.2; Advanced Texts: BX chs.1,10; Romer ch.1.
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The Neoclassical Growth model Solow (1956) and Swan (1956) Simple dynamic general equilibrium model of growth
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Output produced using aggregate production function Y = F (K , L ), satisfying: A1. positive, but diminishing returns F K >0, F KK < 0 and F L > 0 , F LL < 0 A2. constant returns to scale (CRS) 0 all for ), , ( ) , ( = λ L K F L K F replication argument Neoclassical Production Function
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Production Function in Intensive Form Under CRS, can write production function ) 1 , ( . ) , ( L K F L Y L K F Y = = Alternatively, can write in intensive form : y = f ( k ) - where per capita y = Y/L and k = K/L Exercise: Given that Y=L × f(k), show: F K = f’(k) and F KK = f’’(k)/L .
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Competitive Economy Representative firm maximises profits and take price as given (perfect competition) Inputs paid by their marginal products : r = F K and w = F L inputs (factor payments) exhaust all output: wL + rK = Y general property of CRS functions (Euler’s THM)
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This note was uploaded on 06/04/2011 for the course ECONOMICS paper 2 taught by Professor Prado during the Spring '11 term at Cambridge.

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growth2 - Part IIB. Paper 2 Michaelmas Term 2010 Economic...

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