Lecture 8 - ECONOMICS 100B Professor Steven Wood Lecture 8 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley Do

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ECONOMICS 100B Professor Steven Wood 02/10/11 Lecture 8 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS: Problem Set 2 has been posted on bSpace and is due at the beginning of class next Tuesday, February 15. LECTURE Today’s lecture is a continuation of Tuesday’s lecture and examines the Solow Growth Model further, completing Chapter 6. Solow Growth Model: Steady State Recall that the Solow Growth Model combines the per-worker production function: Y/L = A 0 f( K / L), the per-worker saving/investment function: I/L = s 0 A 0 f( K t / L t ), and the per-worker balanced investment function: I b /L = ( δ 0 + g L0 )K/L. This is under the assumption that A is constant, so g A = 0. Based on this, we know that in the steady state, the growth rate of the economy is the same as the growth rate of the labor force, so g Y = g L . Likewise, the growth rate of capital is the same as the growth rate of the labor force, so g K = g L . Thus, during the steady state, g Y = g K = g L . Disequilibrium Suppose (K/L) 1 < (K/L) S , so the economy is below its steady state. This can happen if a natural disaster destroys a country’s capital stock, or if there is a sudden increase in the labor force (substantial immigration causing capital dilution). Both will result in a decrease in K/L. From the following graph, we can see that there is an adjustment mechanism that will move the economy back to its steady state. If (K/L) 1 < (K/L) S , then at (K/L) 1 , we can see that investment is greater than balanced investment, I/L > I B /L. Whenever investment is greater than balanced investment, capital accumulation occurs, so K/L will increase until K/L = (K/L) S . We end up back at the original steady state. Now let’s suppose that (K/L) 1 > (K/L) S , so that the economy is above its steady state. This can happen if a disease kills off a large part of
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This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.

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Lecture 8 - ECONOMICS 100B Professor Steven Wood Lecture 8 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley Do

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