ECON W3213 - PROF
TA: CARLOS MONTES-GALDÓN
These notes are just an outline for my recitation, and therefore, they are not exhaustive. You should
complete them with your own notes from the session.
We want to explore the relationship between GDP per capita, physical capital and growth. First, you should take a look
at this graph,
The main lesson from this graph is that, over a long period of time (43 years), higher investment rates have led to higher
GDP per capita.
In this class, we are going to answer a particular question: can we grow forever by simply investing in capital? In order
to do that, we are going to derive the
Solow-Swan Growth Model
The Solow-Swan Theory of Growth
This is just an
, that is, a simpli±cation of the real world designed to explain a concrete question, using
economic variables. This variables might be exogenous (that is, we will give a value, like “The savings rate is going to
be 30%”) or endogenous (which means that they are derived with the model. That is, the level of capital, for example).
Also, we will impose a set of assumptions that will allow us to solve the model.
In the Neoclassical growth model of R. Solow, we will synthesize the main ideas from classical economists, such as
Adam Smith (1776), David Ricardo (1817), Thomas Malthus (1798), Frank Ramsey (1928), Allyn Young (1928), and Joseph
Schumpeter (1934). These ideas include the basic approaches of competitive behaviour, the role of diminishing returns
and its relation to the accumulation of physical and human capital, the interplay between per capita income and the
growth rate of population, the effects of technological progress, and some others.
In our model, we are going to have two sectors, the production sector (supply) and the demand sector. And, we need to
characterize both sectors. As always, at the end, we will impose that