lecture 2 solow Flashcards
what is the solow model?
a model of decreasing marginal product of capital, endogenous savings rate,
and exogenous total factor productivity growth
what is a steady state
when quantity of investment equals quantity of depreciation
what happens if the level of capital is above or below the ss?
if above, capital stock will be decreasing in the LR toward the steady state. If below capital stock will be growing
what is population growth is large?
capital per capita decreases
what if savings increase in the solow model (closed economy)
capital stock increases as ss is higher - more growth as we are furytenr from ss - unless we are already far above in ss then we will decline rapidly in growth or shrink
what are the factors in the solow curve
investment and depreciation
what may cause depreciation?
higher population growth
why is solow model flawed?
many factors in growthcsolow model cant explain everything
a country far below its steady sate will do what?
grow quickly then slow as it reaches the ss
what happens after an increase in investment in growth
country will grow since investment increase, creating new steady state
Solow predictions of 2 countries’ growth hold if
productivity is the same
Countries with same savings, population growth rates,
TFP levels tend to do what
converge income levels
Why do economies exhibit sustained growth?
techonological evolution
what is growth accounting
methodology that allows
for the breakdown of observed GDP growth into growth of
factor inputs and that of production technologies i.e method to evaluate the main contributors to growth
Empirically, poor countries are growing…
aster than rich countries, but only in the OECD
subsample of countries
According to the Solow model, a higher savings rate will do what for consumption
oncrease in both long run and short run
In the context of Solow model, doubling population size
without changing capital will.
decrease per capita output temporarily
what are the key predictions of the Solow Model?
faster population growth reduces income per capital – this
prediction is empirically validated
countries with unequal initial stock of capital converge to
the same level over time – this prediction is generally not confirmed empirically, but is accurate
for certain groups of countries (OECD members, countries open to trade)
If depreciation is greater than investment what does this mean?
This means that capital stock will be decreasing or shrink over time
is there a substantial amount of empirical evidence to prove solow model
some but not really, highly dependent on initial factors
if 2 countries have the same level of income but different investment rates who will have higher growth?
the greater investment rate country - this is due to having a higher steady state due to investment
if 2 countries have same investment but different income levels what happens? who grows faster?
poorer country as they will be further behind the steady state of income level. eventually it will converge with the rich
comparisons between countries within the solow model only hold true if what
there are no differences other than the controlled components and productivity remains the same
why do poor countries save less?
poor people cannot afford to favour the future over the present in consumption
