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# SOLOW1 - A Simple Growth Model Set up a produc tion...

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A Simple Growth Model Set up a production function, which relates inputs to outputs. We try to imagine the economy as a factory: Y = f(K,L). Output, Y, depends on combinations of inputs of capital and labor, K and L. Particular functions, as Mankiw points out, allow us to transform the original model to a per worker representation, Y/L = f(K/L,1): this says that output per worker (or GDP per worker) depends on capital per worker. Simplify the notation to Y/L y and K/L k and draw a graph of the relationship: capital per worker output per worker y = f(k) Next, take the simple national income model of a closed economy without a government sector, that is, Y = C + I. Here, GDP is just consumption and investment. Put it on a per worker basis as well, to get y = c + i, where Y/L y, or GDP per worker, C/L c, or consumption per worker, and I/L i, or investment per worker. We need to define a consumption function, which relates workers’ consumption to their income, as c = (1 - s) y. This says that workers’

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SOLOW1 - A Simple Growth Model Set up a produc tion...

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