Econ+102+lecture+8%2C+1-31-12+-+Solow+growth+_+growth+policy copy

Econ+102+lecture+8%2C+1-31-12+-+Solow+growth+_+growth+policy copy

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Lecture 8: Steady state equilibrium and  growth policy  Econ 102, Winter 2012 1/31/2012 1 Required reading : Ch 9: pp. 238-247 (can skip last 5 pages of chapter) Cowen & Tabarrok Ch 7: pp. 119-130 (on CTools)
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Outline 1. Long run equilibrium: the steady state Savings, output and growth 2. The role of government: growth policy 3. The benefits of growth Absolute poverty: “ability to consume” Relative poverty: Convergence 1/31/2012 2
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The Steady State The textbook’s growth chapter and the PPF chapter are similar Take inputs, get outputs On the curve, there is full resource utilization: no unemployment They share a common drawback: both set up a model, and then they fail to explain equilibrium ! As with the PPF chapter, we’re now going to go off- book to explain equilibrium in the growth model Equilibrium: the situation where there are no forces 1/31/2012 3
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The Steady State Equilibrium S&D equilibrium: no excess supply or demand exist “Macro choice” equil: no arbitrage opportunities exist to give firms incentive to change mix of goods produces In the growth model, we need to find a state where no forces exist to change k and y No growth! Call this the steady state equilibrium, where there is no growth, and towards which the economy always tends. 1/31/2012 4
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The Steady State The model we will now develop is also often called the Solow Growth Model Its inventor, Robert Solow earned the 1987 Nobel prize Last class, we set up the rule of motion of capital k2 = k1 + s*y1 – d*k1 “tomorrow’s capital stock equals today’s, plus new investment, less depreciated capital” Recall new investment I = s*y, the savings rate times national income Again, equilibrium is the state where there are no 1/31/2012 5
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The Steady State Then in the “very LR” equilibrium (the steady state), per-worker capital in one year will be identical to per- worker capital in the next k2 = k1 Insert that into the rule of motion: k1 = k1 + s*y1 – d*k1 0 = s*y1 – d*k1 d*k1 = s*y1 Or (ignoring the time subscripts): 1/31/2012 6 k s d y =
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This equation is the equilibrium condition of the Solow growth model For any combination of y and k to be an equilibrium, this equation must hold! Recall our example from last class: d=0.05 and s=0.2 Then in the steady state it must be that y = ¼k The equilibrium equation gives one relationship between y and k that must hold in equilibrium. We already have another equation that must hold at all
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Econ+102+lecture+8%2C+1-31-12+-+Solow+growth+_+growth+policy copy

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