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.5
(n+d)k
.4
.3
sk^alpha
.2
.1
k*: steady−state
0
0 1 2.22 3 4
n: population growth
d: depreciation
k̇ = sk α − (n + d)k = 0 (25)
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Note: In the steady-state, aggregate capital, K(t), is not constant:
K̇ k̇ L̇
= + = n > 0. (26)
K k L
Similarly, total (not per capita) output, Y (t) grows as well:
Y = K α L1−α
ln Y = α ln K + (1 − α) ln L
So,
Ẏ K̇ L̇
= α + (1 − α)
Y K L
= αn + (1 − α)n
= n. (27)
These forces cause the economy to tend toward the steady-state over time.
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What does the Solow model say about differences across countries with
regard to levels and growth rates of per capita income?
1. Levels:
sk ∗ α = (n + d)k ∗
∗ α−1 n+d
k =
s
1
1−α
s
k∗ = (28)
n+d
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Per capita income then satisfies:
α
1−α
∗ ∗α s
y =k = (29)
n+d
Diagrams...
38
The Solow Model
.5
.4
.3 s2k^alpha
s1k^alpha
.2
.1
0 1 2.22 3.15 4
.6
(n2+d)k
.4
(n1+d)k
sk^alpha
.2
k*2 k*1
0
0 1 1.75 2.22 3 4
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2. Growth Rates:
The Solow model can in principle account for vast variation across countries
with regard to growth rates, outside of the steady-state.
The further a country is from its steady-state level of per capita capital the
more rapidly it should be growing (or shrinking) to converge to that
steady-state.
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The Solow Model
Growth rate equals red minus blue
.21
Savings and Leakages Divided by k Positive growth Negative Growth
.18
.15
n+d
.12
sk^(alpha−1)
.09
k*
.06
1 2.22 3 4
This does not depend on the assumption of a constant savings rate. It will
happen even if s = 1, that is, if people save all of their income.
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In order to generate sustained economic growth, some assumptions must
be abandoned. Here are a couple of possibilities:
Because we are still studying the Solow model, we will maintain assumption
#1, and allow for technological progress. By this we mean shifts in the
production function over time.
There are many ways for the production function to “shift” over time. That is,
there are many different types of technological progress. In an attempt to be
consistent with two observations:
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i. The return to capital is roughly constant over time.
Other possibilities:
Technological change:
ln A(t) = ln A(0) + gt
(32)
Ȧ d ln A(t)
= = g. (33)
A dA(t)
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Here g is a parameter denoting the exogenous rate of technological
progress.
k̇ y
= s − (d + n)
k k
So, for the growth rate of per capita capital to be constant, it must be the
y Y
case that k = K
must be constant as well.
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