Chapter 9: Economic growth Flashcards
What is the Golden rule savings rate ?
absolute version and per capita
Generally, the savings rate that maximizes steady-state consumption is called the Golden rule savings rate.
In the absolute version, the golden-rule saving rate maximized absolute consumption.
Now, in the per capita version, the golden-rule saving rate maximizes per capita consumption.
What is the per capita version of the Solow model ?
In the per capita version of the Solow model, continuous population growth is incorporated. In this situation, the steady state is defined in per capita terms, while absolute quantities continue to grow. Therefore, the economic variables, i.e income, consumption, savings, capital stock and investment are all expressed in per capita terms
How much is the per capita investment in the steady state ?
that although net per capita investment is zero in the steady-state, net absolute investment is positive, in order to compensate for population growth
Steady state per capita, change in L
Neither the per capita production function nor the investment requirement line is affected by the change in L, and the steady state is solely determined by the per capita capital stock.
globalization ?
the integration of international goods and capital markets
What does the solow model ?
It ignores the temporary ups and downs of the business cycle and explains potential income (output) as it obtains in the long run.
How is the labour force in the basic version of solow ?
While the 3D production function shows output to depend on the capital stock and the labour force, the basic version of the Solow model keeps the labour force fixed at its normal level.
We may then operate with the partial production function that keeps L fixed.
what is steady state ?
The capital stock remains unchanged, or steady, if investment equals (offsets) depreciation.
Link between capital iand firms invest ?
Capital is added when firms invest. Capital is lost due to depreciation. So when investment exceeds depreciation the capital stock grows; when investment falls short of depreciation the capital stock shrinks.
Whether the capital stock grows or shrinks depends on where it currently is.
If it is at K0, firms invest and buy more capital goods than they loose due to depreciation. Net investment is positive. The capital stock will be higher next year. If the capital stock is at K1, investment fails to replace all capital that wears out. Net investment is negative. The capital stock will be lower next year.
Consider the production function Y=F(K,L) with Y being real output, K the capital stock and L employment. If F(K,L) exhibits constant returns to scale and diminishing marginal product.
If capital and/or employment increase, then output increases as well.
When employment is fixed at L0, adding more and more capital yields smaller and smaller output changes.
How do you get the net capital stoc graphically ?
If you “subtract” the required investment line from the savings curve you get the net change of the capital stock
What happens to steady state capital and output if the savings rate is increased?
Capital stock increases, output increases
AD, flexible exchange, gov exp rise ? …
Thus, an increase in government spending cannot change the position of the IS curve. Instead, the change in G induces an appreciation of the home currency until the resulting reduction in net exports exactly offsets the increase in government spending (a case of complete crowding out).
increase in world interse, effect on national currency ?
An increase in the world interest rate induces a depreciation of the national currency, which in turn increases demand for domestic products (net exports go up)
