Part 3 - Solow Model

Question 1

Model Setup

Answer 1

• Exogenous growth model with n > -1
• No unemployment
• Constant returns to scale

Question 2

The slope of the per-worker production function

Answer 2

The slope of the per-worker production function y = zf (k) is the marginal product of capital MPK.

Question 3

Competitive Equilibrium

Answer 3

k = szf(k) + (1-d)k geteilt durch 1+n

Question 4

Predictions of Solow Model

Answer 4

If the savings rate s, the labor force growth rate n, and total factor productivity z are constant, then real income and real consumption per worker cannot grow in the long-run.

Question 5

What is in steady state?

Answer 5

In the steady state all real aggregate quantities grow at the growth rate in the labor force n.
Aggregate real Y, I, C, K,

Question 6

Effects of an Increase in s:

Answer 6

• The levels of capital per worker and output per worker are higher in the new steady state.
• The increase in the savings rate, however, has no effect on the growth rates of aggregate variables.
  I In the steady state, all real quantities grow

Question 7

Effects of an Increase in s on c: (Golden Rule)

Answer 7

• The golden rule savings rate is the savings rate Sgr that maximizes consumption per worker in the steady state.
• The marginal product of capital MPK equals the
  population growth rate n plus the depreciation rate d in the golden rule steady state.

Question 8

Effects of an Increase in n on k:

Answer 8

• Capital and, as a consequence, output per worker decreases.
• Aggregate output, aggregate consumption, and aggregate investment grow at the labor force growth rate n in the steady state, i.e., growth in all of these variables must also increase.

Question 9

Effects of an Increase in z on k:

Answer 9

Sustained increases in total factor productivity cause sustained increases in per capita income.

Question 10

Growth Accounting

Answer 10

In an competitive equilibrium, a is the share that capital receives of national income and 1-a the share that labor receives

Question 11

Reasons for Productivity Slowdown

Answer 11

• Shift from the production of manufactured goods to the production of services.
• Increases in the relative price of energy.
• Costs of adopting new technology.

Question 12

Convergence in the Solow Growth Model

Answer 12

• However, the poorest countries of the world seem to fall behind the richest ones, rather than catching up.
• In reality, countries do not have access to the same technology (and do not have the same institutions). (Absorption, Barriers)