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Unformatted text preview: Review • Proximate causes of income differences – Factor accumulation • capital (Solow Model) • Labor – Factor Productivity • Inferior technologies • Lower efficiency Accumulation and productivity • Chart – rich countries vs. poor countries The Solow Model • Differences in capital generate differences in income….but there are two forces – Accumulation (investment) – Depreciation • Assume that population is constant – (k+1) = k(t) der of k(t)+i(t) – (k+1)k(t) = i(t)  der of k(t) – Change in k = I – der of k. But what about investment • We need to determine investment…. • Households save a constant fraction of their income and then investment is proportional to income. – ϒy or I=ϒf(k) – Δk = ϒ f(k)δk = Fundamental growth rate • change in capital  depreciation Steady State in Solow • Figure 3.4: The steady state of the Solow model....
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This note was uploaded on 11/03/2011 for the course ECON 114 taught by Professor Cindybenelli during the Spring '08 term at UCSB.
 Spring '08
 CindyBenelli

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