WHAT HAPPENS IF WE EXPERIENCE TECH CHANGE

Technology makes capital more effective higher level of production for same level
of capital.
SOLOW GROWTH MODEL

F(k): previous curve (production function for the economy).

k is capital per labor unit (x axis).
L labor force
K amount of capital
Economys robustness is a function of k. More k is better for the economy.
The strength of the economy ability to save money savings provide the
means for others to invest.
Savings and investment
Investment (economics): purchase of buildings (construction)/capital
equipment/facilities/roads/upgrading internet servers. Adding to the capital
stock of the economy. Money on something tangible.
Stock market is not considered investment (not tangible). Its simply a change
of ownership of the share. saving in the stock market
90% of all investment requires borrowed funds. Funding comes from peoples
savings. People dont use their full wages and put them in stock markets,
banks therefore, they provide funding for companies, the government etc.
Wealth
You save and dont use the savings. Wealth is the accumulation of your
savings.
Learn difference of
saving
investment
capital: new construction, purchase of capital equipment (tangible and
non tangible stuff)
wealth
Capital is a stock variable (you measure it without reference to time).
Additions to the capital stock occurs when people invest. Investment is a
flow. Its how much capital you add over the course of the year (change in the
stock is a flow change in the amount of water).
Wealth is a stock variable. A change in wealth comes about by saving. Saving
is a flow.

Savings provide the means for inv.

The red line represents savings (its a percentage of the black curve). That is
why it has the same shape as the black curve. Savings are the ability to
finance investment. The savings also represent new additions to capital
stock. Savings are used to buy capital equipment. Savings is equal to
investment.
Our capital stock decreases also if some capital stock is gone (dead
cars/outdated computers). Things have to be replaced/renovated. Capital
depreciates every year. Loss of capital over time is depreciation. Its is
represented by the water flowing our of the tub.
The graph is not drawn to scale. We dont save 60% of our income, but 5%. If
that was true, the red line would be much lower.
The green line represents depreciation (fairly steady percent).
Dashed line green = red steady state level of capital per labor. Its a
steady state because the level of capital per labor is steady (to the right
depreciating faster than we are replacing it loosing capotal)(left adding
faster than depre too much capital). Equilibrium level of capital labor
that is perfect for the economy.
Offers a model to improve economic prospects. How to improve standard of
living? Increase savings. Allows us to have more capital and higher level of
depreciation. More capital and more funds we can use to cover depreciation.
We are currently using the savings of china to invest in America. Before that
japan, before middle east.
Developing countries are poor and cant save enough. Rich countries give
them foreign aid.
So, why are some countries poor and rich? To an extent because of savings.
NEW GROWTH THEORY
Capital stock isnt being measured by tangible things (IT revolution).
Knowledge capital: knowledge doesnt deteriorate. Its also just as important
as material capital. It is nonrival and nonexcludable (private good). Material
goods are rival. Example (nonex), MIT has open access to all its courses. This
means it could have increasing returns on scale. More people using, more
benefits coming from capital.

Investing in technology and people is crucial (development of new software).

Developing countries invest in education and healthcare (same approach
around the world). x