Week 3 LT

Question 1

What is the difference between the solow growth model and the production function

Answer 1

Capital Accumulation instead of exogeneous K

Question 2

What is the resource constraint equation in the solow growth model

Answer 2

Ct + It = Yt (Output can be consumed or invested)

Question 3

What is assumed in the solow growth model in terms of exports

Answer 3

Closed economy - no imports or exports

Question 4

Capital accumulation equation

Answer 4

Kt+1 = Kt + It - dKt

next years capital = capital + investment - depreciation of capital

Question 5

What is the change in capital from one year to the next equation

Answer 5

change K = It - dKt

Question 6

Allocation of resources equation in solow growth model

Answer 6

It = sYt where s is the proportion of the output invested

Question 7

What is the real interest rate

Answer 7

the amount of money a person can earn by saving one unit of output for a year, or equivalently the amount a person must pay to borrow one unit of output for a year

Question 8

what is the saving vs investing formula

Answer 8

Yt - Ct = It

Output - consumption = investment

Question 9

What are the two equations we use in the solow diagram

Answer 9

change Kt+1 = sYt - dKt

Yt = A x Kt^1/3 x L^2/3

Question 10

Why is the investment curve curved

Answer 10

Diminishing marginal returns

Question 11

What is the steady state K*

Answer 11

Where sY=DK

Question 12

What happens to consumption as you approach the steady state

Answer 12

Increases since diminishing returns for investment

Question 13

What is the formula to find K*

Answer 13

K* = (sA/d)^3/2 x L

Question 14

What is the formula to find Y*

Answer 14

Y* = (s/d)^1/2 x A^3/2 x L

Question 15

How to find steady state output per person

Answer 15

divide both sides of Y* formula by L

Question 16

Why is the exponent on TFP higher in solow than in production function

Answer 16

higher productivity leads to more capital accumulation so therefore the effect of the TFP is higher in solow as it leads to a bigger output than in production function

Question 17

What is the capital to output ratio formula

Answer 17

K/Y = s/d

Question 18

what is the relation between capital output ratio and investment rate

Answer 18

higher investment = higher capital output ratio

Question 19

what does the solow model say about long run growth

Answer 19

there is no long run growth it approaches steady state only

Question 20

what does the fact that solow says no long run growth show

Answer 20

capital aaccumulation is not the engine for long run growth due to diminishing returns

Question 21

what is transition dynamics

Answer 21

further from steady state = higher growth rate

Question 22

strengths of solow

Answer 22

provides a theory to how rich a country is in the long run at the steady state which depends on their investment rate, TFP and depreciation

helps us understand the differences in growth raates across countries

Question 23

negatives of solow

Answer 23

main mechanism is investment in physical capital but quantitative anaalysis shows this only explains a small portion of the differences in income aacross countries - TFP more important

Doesnt explain why countries have different TTFP and investment rates

doesnt provide theory on long run growth