Lecture 1 - Solow Growth model Flashcards
(29 cards)
What is the Solow Growth Model?
An exogenous growth model that explains long-run economic growth through capital accumulation, labor, and technology.
What function is used in the Solow Model to represent production?
The Cobb-Douglas production function.
What are the assumptions of the Cobb-Douglas production function in this model?
Constant returns to scale, typically with 1/3 exponent on capital.
What is the resource constraint in the Solow Model?
Output is either consumed or invested; Ct + It = Yt.
What is the capital accumulation equation?
Kt+1 = Kt + It - δKt.
What does δ (delta) represent in the Solow model?
The depreciation rate of capital.
How is labor treated in the basic Solow model?
It is given exogenously and remains constant.
What happens if investment is greater than depreciation?
Capital stock increases; economy moves toward a higher capital level.
What is the steady state in the Solow Model?
The point where investment equals depreciation and capital stock remains constant.
What are stock variables?
Quantities measured at a specific point in time (e.g., capital stock).
What are flow variables?
Quantities measured over a period of time (e.g., investment).
What is saving in the Solow model?
The difference between output and consumption (Y - C).
What is transition dynamics?
The path an economy takes from an initial capital stock to the steady state.
What determines the steady state level of capital per person (k*)?
k* = (sA / δ)^(1/(1−α))
What is the effect of higher savings (s) on the steady state?
Higher savings lead to a higher steady state capital and output.
What is the effect of higher productivity (A̅) on the steady state?
It increases both capital and output in the steady state.
Why is long-run growth absent in the basic Solow model?
Because of diminishing returns to capital and absence of technological progress.
What happens when the investment rate increases permanently?
Capital increases over time to a new, higher steady state.
What does the principle of transition dynamics say?
The farther an economy is from its steady state, the faster it will grow.
Why did South Korea grow faster than the Philippines?
It was farther below its steady state and had a higher investment rate.
How does population growth affect the Solow model?
It increases depreciation of capital per person, reducing steady state output per person.
What is the long-run growth rate of output per person in the Solow model with no technology growth?
Zero.
What is the rule for the growth rate of a ratio z = x/y?
gz = gx - gy
What is the rule for the growth rate of a product z = x*y?
gz = gx + gy
