Solow model-Trend Growth+Human Capital Flashcards
What do we incorporate in the solow model to allow for trend growth?
Technology
What is the need for technology in the solow model?
Without technology, capital and output p.w growth in the steady state are zero.
- Data shows sustained economic growth
What assumptions do we make about technological change?
It is exogenous I.e determined outwith the model
- grows at constant rate g
What is the balanced growth path?
Where everything (k,y and A ) are all growing at same constant rate g
What parameters effect level of output per worker?
Savings (s) and Population growth (n)
- Only induce temporary surge/decline
- human capital (h)
What is growth of y determined by?
Growth rate of technology A =g
What does modifying the solow model to include human capital allow?
Allows the skills of workers to increase separately from technological progress
Where is labour included within the human capital production function?
Contained within H
What do we assume about the growth rate of human capital (h)
That growth rate of h=0
What does human capital (as determined by u) influence?
Influences level of output p.w
- helps to further explain why some countries are so poor and others so rich
- increased h means increased y meaning country is wealthier
What truly is variable A?
It is the solow residual- it captures everything about a country that makes it more/less productive
What component of the model explains most of the variation in y across countries?
Technology
- explains around 1/2-2/3 of variation
What is the downfall of absolute convergence?
Only works to a reasonable level on countries with similar parameters
-In reality parameters across countries can differ significantly
What is conditional convergence?
Conditional convergence says that countries grow faster, they farther they are from their OWN STEADY STATE
What is convergence?
Convergence says that poor countries grow more quickly than rich countries
- can see how this could be true from growth of k equation
Which explanation of growth rates seems more plausible and why?
Conditional convergence
- because using data on based on a countries deviation from their steady state we can see that the further away a country is from their steady state the higher their growth rate
What is the problem with convergence?
Some poor countries might grow slowly as they are already close to their steady state, whereas convergence says because they are poor they will grow faster
What happens to equality if there is absolute convergence (like in OECD)?
Appears countries become more equal
What happens to equality if there is conditional convergence?
It is possible countries may be getting more unequal
What does the data suggest on equality?
In absolute numbers (rather than looking at countries as units) of people it appears the world is getting more equal
What does the solow model including human capital say is the reason for why some countries are so rich and others so poor?
Countries are rich because they have: - high investment rates
- spend large fraction of time accumulating capital (large h)
- low population growth rates
- high level of technology
