Recitation Notes 2 - E CON W3213 P ROF X AVIER S ALA I-M...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON W3213 - PROF .XAVIER SALA-I-MARTIN TA: CARLOS MONTES-GALDÓN R ECITATION N OTES 2 DISCLAIMER: 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. 1 Introduction 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 . 2 The Solow-Swan Theory of Growth This is just an economic model , 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 supply = demand . 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2.1 The Supply Side of the economy Suppose that you are a baker, and that you produce cheesecakes. In order to produce them you need some kitchen utensils, an oven, your own hands and time, and a recipe to create the cheesecake. The kitchen utensils and the oven are your stock of physical capital K t , the baker provides some human capital, H t , and the recipe is the way that you combine the capital and labor to produce the cheesecake, A t . A t can play a very important role in explaining differences between countries. Suppose two bakers that have the same amount of capital and labor; however, one of them might be able to produce a much better and delicious cheesecake than the other one, because his recipe is better. We are going to put all these factors together in what we call a Production Function . A Production funcion is like a magic box where you put all your factors, and it gives us the amount of GDP that you can produce with them. Usually we write Y t = F ( A t ,K t ,H t ) where H t is the amount of human capital.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 9

Recitation Notes 2 - E CON W3213 P ROF X AVIER S ALA I-M...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online