Term Two Flashcards
What three factors contribute to the Solow Growth Model?
Technical Progress (A)
Capital Accumulation (K)
Population Growth (L)
Define Y/L
Y/K
K/L
Y/L = Output per capita Y/K = Output capital ratio. K/L = Capital per capita
What are Kaldor’s Stylized facts on Growth?
1) K/L and Y/L ratios grow through time.
- Capital Intensity grows through time.
2) The K/Y ratio is steady.
- K and Y grow at a similar rate in the long run.
3) Hourly Wages keep on increasing.
- Y/L increases, productivity increases, meaning wages increase.
4) Profit rates are steady.
- Y/K is constant, output per K is constant (returns to K are constant).
5) The share of L and K in total income remain constant.
- Not matter the level of profit or wages, the shares remain the same (in terms of proportion).
Explain the role of savings in the Solow growth model.
All savings are channeled to investment.
Investment leads to more output.
Higher output will result in more saving and further investment. This is how long-run growth occurs.
What are the two assumptions about the Solow growth Prod Func?
1) There are diminishing marginal product of K and L
2) There are constant returns to scale.
- If you increase K and L by the same amount, Y will increase by the same amount.
this second assumption allows us to write the production function in intensive form.
What do the lower case letters in the intensive form signify?
They signify a ‘per capita’ value.
What does the intensive form production function diagram look like.
The normal production function, just with per capita y and k values on y and x axis respectively.
What is the relationship between Investment, Saving and the Solow growth production function?
S=sY where s is the savings rate
I=S therefore I=sY
I/L = sY/L
Y/L =y=f(k)
f(k)s = I/L
What does it mean if K depreciates?
Depreciation is where capital loses value through use or just time.
Depreciation is the reduction in the stock of capital.
Sigma denotes this.
What is the fundamental Solow Growth Equation
Change in k =sf(k) -(sigma + A + n)k
What is the steady state?
It is a point where there is no capital accumulation or reduction.
sf(k)=sigmak.
Draw the steady state in a diagram.
Lecture wk 13
Slide 27.
The production function is the highest curve. Then lower with similar gradient is the savings function.
Below that is the depreciate (capital Widening line)
Steady state capital is where saving function crosses the depreciation line. Kbar.
What is the rate of growth for K and y in the steady state?
It is zero.
If s increases the equilibrium k and y values (k,y) will increase. However growth will only actually occur in the transition towards the steady state.
What affect do policies aimed at s have?
They will cause a chnage in the Level of per capita income, but not the rate of growth. (In the steady state)
Policies do NOT affect the long run growth beyond the transition period.
slide 33 lecture 13 has a diagram to explain this effect.
What is the rate of growth in y in the steady state?
The rate of growth of y in the steady state is the rate of population growth, n+a possibly or a
that is the change in Y over Y.
What will happen if there is an increase in technical progress, population growth or depreciation rate?
The capital widening line will rotate outwards.
What does Y=F(K,AL) mean
It is labour augmenting technical progress.
AL is now effective labour.
It is labour being measured in efficiency units.
Growth of AL= n+a
What is the steady state growth of Y and K?
What is the growth of Y/L and K/L?
What is the growth rate of y and k = K/AL.
n+a
a
0
Give two ways which will cause a countries’ income to grow through time.
Accumulating K in the transition towards the steady state.
Technical Progress (or pop growth??) During the steady state.
What factors cause one country to be richer than another?
- Savings rate
- Technological Progress
- population growth.
The further an economy is from the steady state, the faster it will grow.
What is Absolute Convergence?
It is where two countries who have the same s, sigma, n and production function, giving the same y and k.
The Poorer country will grow faster than the richer one and will catch up in the transition toward the steady state.
They grow through capital accumulation and there is diminishing returns to capital. The further you are from the steady state, the higher your return.
What are the axis and curves for the Convergence diagrams?
What is different for conditional convergence?
y axis= sf(k)/k
x axis = k
Straight horizontal line; sigma+ n + a
Downward sloping curve; sf(k)/K
For conditional, you draw two steady states and show how the one further from its own SS grows the fastest, regardless of whether it is poorer or richer to begin with.
What is the growth accounting equation?
dA/A = dY/Y -Sl(dL/L) - (1-Sl)(dK/K)
where Sl is the share of labour so the other is share of capital.
What is the Solow Residual?
It is the growth in output which cannot be explained by factor accumulation.
It is effectively Total Factor Productivity (TFP).