The exogenous Growth theory Flashcards
Solow reasons why countries grow
- capital accumulation
- population growth
- technological progress
what is the steady state?
the long run equilibrium
what is said about the steady state in reality?
- we are never exactly at the steady state, but we permanently move around it
- Steady state growth rate: long-run average growth rate = trend
general form production function
Y = F(K, L)
K in production function
capital stock
L in production function
labour = n of workers*hours per worker
Assumptions production function
- Constant return to scale
- marginal product of each factor is diminishing
what is ‘marginal product of each factor’?
by how much output increases for a small increase K(L) while holding the other factor L(K) constant
= 1st derivative of Y to K(L)
What changes in the marginal product of each factor?
how much the marginal product increases for a small increase in K(L), while holding the other factor L(K) constant
= 2nd derivative of Y with respect to K(L)
define diminishing marginal productivity
each additional increase in one production increases Y but less and less
savings > depreciation
capital stock rises, output grows
savings < depreciation
capital stock decreases, output decreases
the golden rule
steady state value of the capital-labor ratio maximizes consumption, when MPK = marginal costs = depreciation
capital per worker k = K/L decreases for what to reasons?
- capital depreciation
- population growth
Assumption A in Solow model
- A grows at constant rate ‘a’ and it exogenous
- A is labor augmenting
