Growth - exogenous & endogenous growth Flashcards
(29 cards)
What are the components of the Solow-Swan production function?
Output is produced using capital, labour, and labour-augmenting technology
What does monotonicity mean in the Solow production function?
If any of the three inputs increases, then GDP increases
What is concavity in the Solow production function?
Each input exhibits diminishing returns
What is meant by constant returns to scale in Solow?
Doubling inputs results in doubling GDP
What is Hicks-neutral technological progress?
Y = AF(K,L)
A increases and isoquants shift northeast ie MRT is unaffected
What is Harrod-neutral technological progress?
Y = F(K, AL)
A augments labour and isoquants shift along the L-axis
if A increases
What is Solow-neutral technological progress?
Y = F(AK, L)
A augments capital and isoquants shift along the K-axis
if A increases
What determines the law of motion of capital?
Capital increases through active investment and decreases via passive depreciation
What is the investment rule in Solow?
It = sYt
(1-s)Yt is spent on consumption
Ct = (1-s)Yt
What is the resource constraint in Solow?
Yt = Ct + It
output is a function of consumption and investment
How do population and technology grow in the Solow model?
L’(t) = gLLt
net population growth rate gL is exogenous and constant but can be affected by policy eg. fertility policy
A’(t) = gAAt
net growth rate of technology growth (gA) is exogenous and constant but can be affected by policy eg R&D subsidies
What is the steady state condition in Solow?
k’(t) = 0, meaning kt = Kt/(AtLt) is constant
steady state = achieving time-invariant growth rates
It will grow matching the pace of At and Lt ie gA = gL
The model predicts both constant GDP growth and constant GDP per capita growth
How is the steady state reached?
When investment equals (gA + gL + δ)K, capital stock stops changing
- When K0<K*: At K0, the amount of investment (sY) exceeds the amount of depreciation [(gA + gL + )K] so the capital stock increases: change in Kt+1 = sY - (gA + gL + )K > 0
- This process continues until the economy reaches K*, where the amount of investment being undertaken equals the capital lost by depreciation, so the capital stock doesn’t change – this is the steady state
What is convergence and catch-up in Solow?
Poorer countries grow faster toward the same steady state
What is the Balanced Growth Path in Solow?
gY = gK = gA + gL
Kaldor’s facts (1961):
1) Yt/Lt exhibits continual growth
2) Kt/Lt exhibits continual growth
3) Kt/Yt is roughly constant over time
4) MPK is roughly constant over time
5) Capital and labour shares are roughly constant over time
6) Real wages grow over time
Facts 1-3 suggest that GDP and capital should grow at roughly the same rate
What are Kaldor’s facts?
GDP per worker and capital per worker grow, K/Y is stable, MPK and factor shares are stable, real wages grow
What is capital thinning?
Less capital per effective worker due to tech progress
- happens bc when there is a new technological discovery g’A > gA therefore: tech increases the number of effective workers, bc tech is L augmenting
What does the Golden Rule refer to?
The savings rate that maximizes steady-state consumption
What happens when the savings rate (s) decreases?
Steady-state output and capital fall, potentially raising consumption if s was too high.
The investment curve shifts downwards and the steady state output and capital decrease (k* -> k, y* -> y)
• Output per capita is permanently lower after the exogenous fall in the savings rate
- However, if the economy began with a savings rate above the golden rule level, consumption per capita is higher in the new steady state – if the new savings rate is closer to the golden rule level
- The assumption of diminishing returns to capital means that the initial fall in the growth rate of the capital stock does not bring a proportionate decrease in output
What are the general results in long-run steady state?
Output per head increases with A and s; decreases with gL and δ
What does the Solow model suggest empirically?
Weaker correlations with population growth and saving; large unexplained variations exist
What is the core idea of endogenous growth models?
People produce ideas based on existing ideas
What is the assumption in Romer’s 1990 model?
ϕ = 1; scale effects and exponential growth
Why does Jones modify Romer’s model?
To assume 0 < ϕ < 1 for diminishing returns
