Questions for Week 10 Flashcards
(20 cards)
What does the Solow-Swan model primarily aim to explain?
The model explains long-term economic growth by focusing on capital accumulation, labour growth, and productivity. It predicts a steady-state where output per capita stabilizes.
What are the key variables in the Solow-Swan model?
Key variables include: Capital (K) and labour (L), Total Factor Productivity (A), Savings rate (s), depreciation rate (d), and population growth rate (n).
Why is the relationship between per capita capital stock and per capita GDP depicted as a curve?
The curve shows diminishing returns to capital, where each additional unit of capital increases output by a progressively smaller amount, flattening the production function as capital increases.
What is the difference between replacement investment and net investment?
Replacement investment maintains capital stock by offsetting depreciation, while net investment adds to capital stock, supporting growth.
How is the steady state achieved if capital per worker is below the steady state?
If capital per worker is below the steady state, net investment is positive, increasing capital per worker until the steady-state level is reached.
What happens when capital per worker is above the steady state?
When above the steady state, depreciation and population growth exceed investment, reducing capital per worker back to the steady-state level.
According to the Solow-Swan model, under what conditions will per capita income grow?
Per capita income grows when total factor productivity (TFP) improves, as capital accumulation alone eventually faces diminishing returns.
What are the limitations of the Solow-Swan model?
The model assumes exogenous TFP and savings rates, failing to explain how technological progress occurs. Endogenous growth models address this by integrating factors like R&D and human capital.
What effect does a lower depreciation rate have on the steady-state capital-labour ratio?
A lower depreciation rate flattens the replacement investment line, increasing the steady-state capital-labour ratio as less capital is lost to depreciation.
How does an increase in the population growth rate affect the Solow-Swan diagram?
Higher population growth steepens the replacement investment line, reducing the steady-state capital-labour ratio due to greater capital dilution.
Given a production function Y/L=A K/L, how do we express the steady-state capital-labour ratio K/L?
At steady state, θ(Ak^0.5)=(n+d)k. Rearranging and solving yields k*=(Aθ/(n+d))^2.
If A=2 and savings rates and population growth differ between developed and developing countries, what does this imply for income per worker?
Higher A increases the steady-state output per worker, meaning developed countries with higher savings and lower population growth rates achieve higher per capita income levels.
How can a less-developed country increase its income level according to the Solow-Swan model?
Less-developed countries can raise income by: Increasing the savings rate, Reducing population growth (e.g., family planning), Improving TFP through education and technological adoption.
Why is raising TFP more effective than simply increasing the savings rate?
Higher TFP boosts output independently of capital, overcoming diminishing returns and allowing for sustained growth.
How does the AK model differ from the Solow-Swan model?
The AK model, an endogenous growth theory, assumes no diminishing returns to capital by including human capital and infrastructure, allowing capital accumulation to drive sustained growth.
What are the policy implications of the AK model for long-term growth?
Since capital includes public goods with positive externalities, policies promoting education, health, and R&D can enhance growth by increasing productive capacity.
What is the convergence hypothesis in the Solow-Swan model?
Convergence suggests that economies with similar savings, population growth, and technology will move toward the same steady-state income, with poorer countries growing faster to catch up.
Why do we not observe convergence across all countries?
Countries differ significantly in technology, savings, institutions, and policies, leading to divergent steady states and preventing uniform convergence.
If a country increases its savings rate, how does it affect the steady-state level of output per capita?
A higher savings rate raises the steady-state capital per worker, increasing output per capita. However, growth rates do not increase in the long run due to diminishing returns.
How does the Solow-Swan model handle technological improvements?
Technological progress shifts the production function up, leading to higher steady-state output per worker. However, in the standard model, TFP improvements are exogenous.
