EC489Lecture2 - EC489.01 Special Topics in Economics:...

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EC489.01 Special Topics in Economics: Macroeconomics Lecture 2
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Where were we? Classical theory in the long run No role for technology, fixed factors of production A static picture of the economy No explanation for income differences across countries or over the time
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Facts Large international differences Some countries seem to catch up Others lagging behind
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Solow growth model Developing a theory of economic growth Saving, capital accumulation and technological progress affect level of output and its growth ver time over time First step: Supply and demand determining accumulation of capital (holding labor and technology fixed)
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Supply side Y=F(K,L) Production function with CRTS property allowing normalization z Y=F( z K, z L) => Y/L=F(K/L, 1) Size of the economy (L) has no impact on the relationship between Y/L and K/L MPK=f( k +1)-f( k )
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Demand side y=c+i Government ignored Fixed saving rate 0<s<1 => c=(1-s)y Substituting consumption: y= (1 -s ) y+i => i=sy k is key determinant influenced by i and δ Change in capital stock= investment-depretiation Steady state level of capital: k*
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Numerical example Model calibration Cobb-Douglas production function with α=0.5 s= 0.3, δ=0.1, k =4 Iterate approaching the steady state: 0 = s f (k*)- δ k* Calculate k*
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Saving rate Higher s, higher steady state capital stock Link to crowding out: budget deficit=> lower national savings => lower capital stock => wer output lower output But! The impact is only temporary (till reaching the new steady state) Level effect rather than growth effect
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This note was uploaded on 07/31/2011 for the course ECON 489 taught by Professor Atacanberkay during the Summer '11 term at Boğaziçi University.

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EC489Lecture2 - EC489.01 Special Topics in Economics:...

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