Evaluating the Solow Growth Model
a) Satisfies many Stylized Facts of economic growth. b) Although the growth rate in per capita output is the same as that of technology, the latter is exogenously given (i.e. not explained in the model how the growth rate
Stylized Facts of Economic Growth
1. Income per unit capital (Y/K) does not change. This means both Y and K grow at the same rate. Both K and Y grow at the rate of (n+g).
Stylized Facts of Economic Growth
International data (averaging over long period of time) suggest the followings: Income per unit capital (Y/K) does not change. Income per capita (Y/N) and Capital per capita (K/N) grow at constant rates. Rental price of
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Students must observe the University's policy on Honesty in Academic Work (please see http:/www.cuhk.edu.hk/policy/academichonesty/ ). Every assignment must be accompanied by a signed declaration of originality. For group project
In the Steady State
By a similar argument:
y ' y A' A = =g y A
So both output per worker and capital per worker grow at the rate of technology, g, at the steady state, satisfying one of the Kaldors Stylized Facts of Growth.
Assessment Methods
Midterm (50%) The Midterm will cover all the topics in the Long Run part of the syllabus Final (50%) The Final will cover all the topics in this course
In the Steady State
But how about output per worker and capital per worker? Is there growth in output per worker (not per effective worker) in the steady state?
~K k = k= AN A ~ k 'k k 'k A' A =0 ~= k A k k 'k A' A = =g k A
So capital per worker grows at
Roadmap
ECO2021 Long Run Short Run
National Income Determination Economic Growth Inflation and Unemployment
The Business Cycle Macroeconomic Models with Microfoundations Monetary Economics
Government Debt and Social Security
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~ ~ ~* k '= k = k
In the Steady State
~* ~* sf (k ) = (d + g + n)k
Substituting in the Capital evolution equation:
In the steady state, both output per effective worker ~ And capital per effective worker k do not grow. Hence:
~ y
~ k 'k ~ =0 k ~ ' ~ yy ~
Course Contents
II. SHORT RUN Prices are not flexible (sticky) Fluctuations around the equilibrium (business cycles) Business Cycles Models Fiscal and Monetary Policies to smooth fluctuations Exchange Rate Regimes/Crises
Deriving the Capital Evolution Equation (Again)
~ ~ ~ k 'k = sf (k ) (d + g + n)k
There is a steady state in which k does not increase further:
~ ( d + g + n) k
~
~ sf (k )
~ k
Production Side of the Economy
Assume also that we have a Constant Returns to Scale technology (e.g. Cobb Douglas):
i.e. Y = F (K, L)
Since we assume capital and labour are fixed in their supply quantities at a point in time:
Y = F (K , L ) = Y
Key point:
Stylized Facts of Economic Growth
5. Rates of growth and levels of income vary substantially across countries (nonconvergence).
Model predicts that all countries should have the same long-run growth rate equaled to g which is not what we observe.
Production Side of the Economy
Y = F (K, L)
Assume that F exhibits: Positive marginal products Y
Marginal products decreases as labour/capital increases
Y FK > 0 K Y FL > 0 L
K
2Y FLL < 0 2 L 2Y FKK < 0 2 K
Stylized Facts of Economic Growth
4. Wages (w) grow at a constant rate
From the second FOC:
w = A(1 ) K ( AN ) ~ w = A(1 )k w' w A' A = =g w A
Since k does not change in the steady state and (1-) is constant.
~
So wages w do grow at a constant rate
Stylized Facts of Economic Growth
3. Rental price of capital (r) is constant
From the first FOC:
r = K 1 ( AN )1 d = 0 ~ 1 r = k d
Since
~ does not change in the steady state, r is constant. k
Classical Macroeconomics
Building blocks of macroeconomics Theory before the Keynesian Revolution. Classical theory assumes: Market Clearing (Flexible Prices) Fixed Capital Stock at a point in time Full Employment at a point in time
Roadmap of ECO2021
ECO2021 Long Run Short Run
National Income Determination Economic Growth Inflation and Unemployment Government Debt and Social Security
The Business Cycle Macroeconomic Models with Microfoundations Monetary Economics Fiscal Policy/Publi
Stylized Facts of Economic Growth
3. Rental price of capital (r) is constant
The firm chooses K and N to maximise profit, so taking FirstOrder Conditions
= K 1 ( AN )1 r d = 0 K = A(1 ) K ( AN ) w = 0 N
Announcements
WEBCT http:/webct.cuhk.edu.hk/
Tutorial Times There will be no tutorial sessions generally. Problem sets (submission not required) will be given and suggested solutions will be offered. If you have questions to ask, see your TAs. TA Office
Stylized Facts of Economic Growth
3. Rental price of capital (r) is constant
Think about the Cobb-Douglas Function:
Y = K ( AN )1
The economys profit function is:
= Y wN rK dK = K ( AN )1 wN rK dK
The Chinese University of Hong Kong Department of Economics
ECO2021 Intermediate Macroeconomic Theory
2009-2010 (Second Term)
Lecture 2: Introduction to Classical Macroeconomics
15 January 2010 Professor Wallace K C Mok
Deriving the Capital Evolution Equation (Again)
Does it mean that there is no steady state? Define output per effective unit of labour and capital per effective unit of labour
~= Y y AN
Log differentiating:
~K k= AN
~ k ' k K ' K A' A N ' N ~= K A N k ~ ~