Michaelmas Flashcards
Define ‘bubble’
Asset prices based upon an unrealistic view of the future
Define ‘parameter’
Fixed value fired in by the model builder
What is the rough proportion of income on capital and labour?
Capital 1/3, Labour 2/3
Labour down slightly in recent years after this has been long established
How do Laspeyers index and Paasche index differ?
Real GDP measures L: Initial year prices, P: Final year prices
What is CRS
If Y=F(K,L),
aY=F(aK,aL)
What two things are assumed for neoclassical production function?
CRS and diminishing marginal returns
What is Cobb-Douglas production function?
Y=AK^αL^(1-α)
What are neoclassical assumptions about firms other than they are small, price takers?
Profit max
Profit = P*F(K,L) - RK - WL
When solving neoclassical production function, what is real wage?
(W/P)*=MPL (as profit max)
=(1-α)x(Y/L)
When solving production function, what is real capital cost?
(R/P)*=MPK (as profit max)
=(α)x(Y/K)
In the neoclassical production function how are labour and capital supplied?
In a fixed quantity, perfectly inelastically
Derive the share of capital income of GDP
(R/P)=αx(Y/K)
so (R/P)K= αY
so α
Derive the share of labour income of GDP
(W/P)=(1-α)x(Y/L)
so (W/P)L= (1-α)Y
so (1-α)
Why is total economic profit = 0 nationally according to neoclassical prod. function?
Profit = Y - MPLxL - MPKxK and Y=F(K,L)=MPLxL+MPKxK
Perfect competition drives profits to zero
What proportion of GDP/capita difference is explained by capital per person and what by TFP?
k: 1/4
TFP: 3/4
Order investment, consumption and NX by volatility
Consumption > Invesment <> NX
As MPC is reasonably close to 1
Expected consumption is equal to what?
Disposable income / (1-c)
In production function (and in reality) what is supply of loanable funds?
Model: perfectly inelastic in r
Reality: Depends positively on r (especially more long term)
What equilibrates AS and AD in production function?
r
AD: Y=C(Ybar-Tbar) +I(r) + Gbar
AS: Ybar=F(Kbar,Lbar)
so only available adjustment is in r
Total savings equals what? (must be able to derive)
Y-C-G
What is the SGM eqn of motion
Δk=sf(k)- 𝛿k
What is LR determinants of output under SGM
A, s, 𝛿, L, a
Other than homogenous output and profit max, what are assumptions of SGM?
Exogenous tech growth and (K,L) may grow over time
What is k*? Must be able to derive (MBD)
k*=A^(1/(1-a))x(s/ 𝛿)^(1/(1-a))
When will golden rule output occur?
MPL = ( 𝛿+n+g)
Gradient of two lines equal so max gap.
What is savings rate in golden rule? (MBD)
s=a
Is s>a dynamically efficient?
No. k>k*gold.
No sacrifice of C required in SR
s less than a dynamically efficient?
Yes. SR sacrifice of C would be required (as saving more)
Define dynamic efficiency?
Impossible to make one generation better off without sacrifice from another
What does conditional convergence depend on?
s, n, 𝛿, g, (a largely the same for all countries so not really)
Derive the fundamental equation of Augmented Solow Growth Model? (On paper)
Change in k = sxf(k) - k(n+g+𝛿)
Romer finds (n+g+ 𝛿) roughly equal to what?
6%
Roughly how much convergence per year to steady state output is typically observed?
2%
