Lecture 6

Question 1

Capital Accumulation Equation

Answer 1

Process:
At Year 0->
Start off with K0
You bring good to factory to work in the production function
You get some output of Y0— you can consume C0, or you can invest I0
Investment is to replace the goods that got damaged due to depreciation
Depreciation is dK0
Now we are left with K1=K0-dK0+I0
Cycle repeats

Question 2

Cobb-Douglas Production Function

Answer 2

Yt=AKt^0.4*L^0.6
AKt is capital, 40% of output
L is labor, 60% of output

Question 3

What happens if you double K and L in the Cobb-Douglas Production Function?

Answer 3

You get double the original output
Constant returns to scale (scaling up by 2x)

Question 4

Per Capita Output

Answer 4

Yt=Yt/L

Question 5

Per Capita Capital Stock

Answer 5

Kt=Kt/L

Question 6

If investment>depreciation

Answer 6

Expanding

Question 7

If investment<depreciation

Answer 7

Contracting

Question 8

Accumulation Process in Solow Growth Method

Answer 8

Accumulation starts large and as it continues it will accumulate in smaller increments (the larger the economy, the harder it is to grow); Want to reach the point where depreciation=investment (Kss)