Lecture_6

Lecture_6 - INTERMEDIATE MACRO THEORY, CHAPTER 5 Fall,...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
INTERMEDIATE MACRO THEORY, CHAPTER 5 Fall, 2011, UC Davis Giovanni Peri, Professor of Economics, gperi@ucdavis.edu
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Introduction In this section, we learn: how capital accumulates over time, helping us understand economic growth. the role of the diminishing marginal product of capital in explaining differences in growth rates across countries. the principle of transition dynamics: the farther below its steady state a country is, the faster the country will grow. the limitations of capital accumulation, and how it leaves a significant part of economic growth unexplained.
Background image of page 2
3 The Solow growth model is the starting point to determine why growth and income per capita differs across similar countries it builds on the production model by adding a theory of capital accumulation. developed in the mid-1950s by Robert Solow of MIT and the basis for the Nobel Prize he received in 1987 This is still the basic model used (with some enhancements) to approach growth issues, especially from an empirical point of view.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 The Solow growth model capital stock is no longer exogenous. capital stock is “endogenized”: converted from an exogenous to an endogenous variable. Namely we study the mechanism through which people save, invest and generate accumulation of capital. the accumulation of capital is a possible engine of long-run economic growth
Background image of page 4
5 Setting Up the Model Start with the production model from chapter 4 and add an equation describing the accumulation of capital over time. Production The production function: is Cobb-Douglas has constant returns to scale in capital and labor has an exponent of one-third on capital and two thirds on labor Variables are time subscripted as they may potentially change over time 3 / 2 3 / 1 t t t L K A Y =
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Output can be used for either consumption ( C t ) or investment ( I t ). This is a simplified version of the national accounting identity (no government and closed economy) A resource constraint describes how an economy can use its resources t t t Y I C = +
Background image of page 6
7 Capital Accumulation capital accumulation equation: the capital stock next year equals the sum of the capital at the beginning of this year plus the amount of investment undertaken this year minus depreciation t t t t K d I K K + = + 1
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Depreciation is the amount of capital that wears out each period the depreciation rate is viewed as approximately 10 percent
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 32

Lecture_6 - INTERMEDIATE MACRO THEORY, CHAPTER 5 Fall,...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online