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Unformatted text preview: 1 81 The Sources of Growth and the Solow Model Part 2 82 Agenda 1. The Solow Models Disequilibrium Dynamics 2. The Solow Growth Model and Convergence 3. Changes in the Saving Rate, s 4. Changes in the Labor Force Growth Rate, g L 5. Productivity Growth in the Solow Model 83 The Solow Growth Model The Solow Growth Model combines: 1. The perworker production function , 2. The perworker saving function , and 3. The perworker balanced investment function. It initially assumes that A is constant. So there is no productivity growth, i.e., g A = 0 84 S The Solow Growth Model K/L Y/L, I/L, I B /L I/L = s *A* f(K/L) I B /L = ( + g L0 )K/L Y/L = A* f(K/L) (Y/L) S (I/L) S = (I B /L) S (K/L) S 2 85 Disequilibrium Dynamics What if the economy is BELOW its steady state? 1. Suppose (K/L) 1 < (K/L) S 86 S Disequilibrium Dynamics K/L Y/L, I/L,I B /L I/L = s *A* f(K/L) I B /L = ( + g L0 )K/L Y/L = A * f( K/L ) (Y/L) S (I/L) S = (I B /L) S (K/L) S 87 Disequilibrium Dynamics What is the adjustment mechanism that moves the economy to its steadystate? 1. If (K/L) 1 < (K/L) S , then at (K/L) 1 , I/L > I B /L 2. If I/L > I B /L, then K/L will increase. 3. This process continues until K/L = (K/L) S 88 Disequilibrium Dynamics What if the economy is ABOVE its steady state? 2. Suppose (K/L) 1 > (K/L) S 3 89 S Disequilibrium Dynamics K/L Y/L, I/L, I B /L I/L = s *A*f(K/L) I B /L = ( +g L0 )K/L Y/L = A*f(K/L) (Y/L) S (I/L) S = (I B /L) S (K/L) S 810 Disequilibrium Dynamics What is the adjustment mechanism that moves the economy to its steadystate? 1. If (K/L) 1 > (K/L) S , then at (K/L) 1 , I/L < I B /L 2. If I/L < I B /L, then K/L will decline. 3. This process continues until K/L = (K/L) S 811 The Solow Growth Model With no productivity growth: 1. The economy reaches a steady state, 2. with a constant capitaltolabor ratio, K/L, and 3. with constant outputperworker, Y/L. The steady state is where the economy converges to in the long run and so is the longrun equilibrium for the economy. 812 The Solow Model and Convergence Countries that are similar in 1. Total factor productivity, 2. Labor force growth rates, 3. Saving rates, and 4. Depreciation rates will eventually converge to similar 1. Capitaltolabor ratios, and 2. Incomeperworker levels. 4 813 S The Solow Model and Convergence K/L Y/L, I/L,I B /L I/L = s *A*f(K/L) I B /L = ( +g L0 )K/L Y/L = A*f(K/L) (Y/L)...
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This note was uploaded on 07/21/2011 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.
 Spring '08
 Wood

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