Solow Swan Flashcards
Resource Constraint:
C + I = Y
Resource Allocation:
I = s̅Y
Capital Accumulation:
ΔK = s̅Y - d̅K
What happens to C when S increases?
Falls, but rises as new SS is reached
Steady state K* =
(s̅A̅ / d̅)^(3/2)L̅
Steady State Y* =
(s̅/d̅)^(1/2) A̅^(3/2)L̅
Steady State y* =
(s̅/d̅)^(1/2) A̅^(3/2)
Capital output ratio:
K/Y = s̅/d̅
What is the underlying driver of the steady state?
Diminishing Returns of capital
What prediction does the principle of transition dynamics make about countries?
The poorest countries should grow quickly and the richest should grow slowly, and because most countries grow at similar rates, implies most countries have already reached steady state
Golden rule level of savings:
The level of capital associated with the value of the savings rate that yields the highest level of consumption in steady state. The point at which the slope of the PRODUCTION FUNCTION (MPK) is equal to d̅
Why might movement towards golden rule level not be preferred?
Increasing savings rate will increase C in the long run but in the present will only lead to decreased consumption until movement towards desired steady state occurs. Consumption now vs consumption later
In the production function, g̅y=
1/3 g̅K
When does g̅c = g̅y in Solow Swan?
When s & d have not changed
What is the result of foreign aid that increases K?
Temporary, will not result in new steady state
