Week 3 LT Flashcards
What is the difference between the solow growth model and the production function
Capital Accumulation instead of exogeneous K
What is the resource constraint equation in the solow growth model
Ct + It = Yt (Output can be consumed or invested)
What is assumed in the solow growth model in terms of exports
Closed economy - no imports or exports
Capital accumulation equation
Kt+1 = Kt + It - dKt
next years capital = capital + investment - depreciation of capital
What is the change in capital from one year to the next equation
change K = It - dKt
Allocation of resources equation in solow growth model
It = sYt where s is the proportion of the output invested
What is the real interest rate
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
what is the saving vs investing formula
Yt - Ct = It
Output - consumption = investment
What are the two equations we use in the solow diagram
change Kt+1 = sYt - dKt
Yt = A x Kt^1/3 x L^2/3
Why is the investment curve curved
Diminishing marginal returns
What is the steady state K*
Where sY=DK
What happens to consumption as you approach the steady state
Increases since diminishing returns for investment
What is the formula to find K*
K* = (sA/d)^3/2 x L
What is the formula to find Y*
Y* = (s/d)^1/2 x A^3/2 x L
How to find steady state output per person
divide both sides of Y* formula by L
Why is the exponent on TFP higher in solow than in production function
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
What is the capital to output ratio formula
K/Y = s/d
what is the relation between capital output ratio and investment rate
higher investment = higher capital output ratio
what does the solow model say about long run growth
there is no long run growth it approaches steady state only
what does the fact that solow says no long run growth show
capital aaccumulation is not the engine for long run growth due to diminishing returns
what is transition dynamics
further from steady state = higher growth rate
strengths of solow
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
negatives of solow
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
