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
define endogenous variables
variables to be explained in an economic model
conditional convergence
countries with different production functions will converge to different steady states, characterized by different levels of output per labour
define exogenous variables
Variables that the model does not explain
additional production factors to the solow model
- human capital
- public infrastructure
- social infrastructure
