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ECON 10:26 - Solow Growth Model(Nobel prize 87 GDP = Y C I...

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Solow Growth Model (Nobel prize, ’87) GDP = Y + C + I + G + NX - for this model, we assume closed economy and Government does not exist - therefore, GDP = Y + C + I o This means only firms and households S = savings N = population growth rate D = depreciation rate for capital What is the level of output for which the economy stops growing? What is the level of savings for which the economy stops growing? EQUATIONS The production function Y = A(K^e)(L^1-e) A – we could have more factors of production, but capital and labor capture the two most important factor of production K – physical capital at time T L – we assume that everyone alive is working = total number of working (which is also the total number of people in the economy [even the babies]) Total savings = S = sY Little s = savings rate (expressed as a percentage) Big S = national savings Y = disposable income (since there is no government, we do not have to worry about taxes) S = I Total savings = total investment This is the financial market Income – savings = consumption AKA
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