Week 10 Flashcards
(20 cards)
What is the Solow-Swan model, and what does it explain?
The Solow-Swan model, or the neoclassical growth model, explains long-term economic growth by examining the roles of capital accumulation, labour, and productivity, predicting a steady-state growth rate based on these factors.
What are the main assumptions of the Solow-Swan model?
The model assumes:
- Constant returns to scale,
- Diminishing returns to capital and labour,
- Exogenous savings rate and population growth,
- Exogenous technological progress.
How do savings and investment relate to economic growth in the Solow model?
Savings provide resources for investment in capital, which increases output. Higher savings rates can raise steady-state income per capita, though growth eventually levels off due to diminishing returns.
Write the income and savings identity for a closed economy.
For a closed economy:
Y=C+I+G
Rearranged with private savings S=Y−C−G, we have I=S.
What is the production function in the Solow-Swan model?
The aggregate production function is Y=AF(K,L), where A is total factor productivity, K is capital, and L is labour.
How does the model incorporate diminishing returns?
Each additional unit of capital adds less to output when labour and technology are fixed, reflecting diminishing marginal returns to capital.
What is the steady state in the Solow model?
The steady state is where capital per worker (k) and output per worker (y) remain constant over time, with net investment equaling the combined effects of depreciation and population growth.
Write the steady-state condition for capital per worker in the Solow-Swan model.
The steady-state condition is: Δk=sf(k)−(d+n)k=0 where s is the savings rate, f(k) is the production function per worker, d is the depreciation rate, and n is the population growth rate.
What role does Total Factor Productivity (TFP) play in the Solow model?
TFP (A) drives long-term growth by enhancing the efficiency of capital and labour, allowing for sustained increases in output even with fixed input levels.
Why is long-run growth zero in the Solow-Swan model without TFP growth?
Due to diminishing returns to capital, capital accumulation alone cannot sustain growth indefinitely; only technological progress can generate sustained growth.
How does depreciation and population growth affect capital per worker?
Depreciation and population growth reduce capital per worker. To maintain steady-state capital per worker, investment must offset these reductions.
Given a depreciation rate of 5% and a population growth rate of 2%, what investment rate is needed to keep capital per worker constant?
The required investment rate must match the effective depreciation rate, which is d+n=5%+2%=7%.
How does an increase in the savings rate affect the steady-state level of income per capita?
An increase in the savings rate raises capital per worker in the steady state, leading to higher output per capita. However, it does not change the long-run growth rate.
What is the impact of higher population growth on the steady state?
Higher population growth raises the effective depreciation rate, reducing capital per worker and output per worker in the steady state.
What does the Solow-Swan model predict about income convergence across countries?
The model predicts conditional convergence, where countries with similar savings rates, population growth, and technology levels will converge in income levels over time.
What evidence supports conditional convergence?
Empirical data shows that countries within similar economic groups (e.g., OECD) tend to converge in income, while countries with different characteristics do not.
How does TFP growth affect the production function?
TFP growth shifts the production function upward, allowing higher output per worker for any given level of capital per worker, supporting sustained growth.
Why is TFP essential for overcoming diminishing returns in capital?
TFP improves output independently of capital accumulation, providing a means to sustain growth despite diminishing returns to capital.
How does endogenous growth theory differ from the Solow-Swan model?
Endogenous growth theory suggests that growth can be sustained by factors within the economy, like R&D and human capital investment, which can drive TFP growth and avoid diminishing returns.
How does endogenous growth theory treat human capital and technology?
It includes human capital and technology as endogenous factors, implying that policies and investments can influence long-term growth directly.
