Macroeconomics 2

MACROECONOMICS 2
Mahyus Ekananda

Growth Theori - Introductiom

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The Solow model focuses on four variables: output (Y ), capital (K), labor
(L), and ‘‘knowledge’’ or the ‘‘effectiveness of labor’’ (A).

where t denotes time

Notice that time does not enter the production
function directly, but
only through K, L, and A. That is, output
changes over time only if the
inputs to production change. In particular, the
amount of output obtained
from given quantities of capital and labor rises
over time there is technological
progress only if the effectiveness of labor
increases.
Notice also that A and L enter
multiplicatively. AL is referred to as
effective
labor, and technological progress that
enters in this fashion is known as
labor-augmenting or Harrod-neutral.
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The Solow model focuses on four variables: output (Y ), capital (K), labor
(L), and ‘‘knowledge’’ or the ‘‘effectiveness of labor’’ (A).

where t denotes time

The central assumptions of the Solow model concern the properties of the
production function and the evolution of the three inputs into production
(capital, labor, and the effectiveness of labor) over time. We discuss each
in turn.

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The first is that the economy is big enough that

the gains from specialization have been exhausted. In a very small economy,
there are likely to be enough possibilities for further specialization that
doubling the amounts of capital and labor more than doubles output. The
Solow model assumes, however, that the economy is sufficiently large that,
if capital and labor double, the new inputs are used in essentially the same
way as the existing inputs, and so output doubles.

The second assumption is that inputs other than capital, labor, and the
effectiveness of labor are relatively unimportant. In particular, the model
neglects land and other natural resources. If natural resources are important,
doubling capital and labor could less than double output. In practice,
however, as Section 1.8 describes, the availability of natural resources
does not appear to be a major constraint on growth. Assuming constant
returns to capital and labor alone therefore appears to be a reasonable
approximation.

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specific example of a production function

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Bagaimana bentuk persamaan n dan g ?

𝑑𝑋(𝑡)
𝑋ሶ 𝑡 =
𝑑𝑡
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𝑑𝑋(𝑡) 𝑋(𝑡) 𝑑𝑋(𝑡) 1

ሶ
𝑋𝑡 = = / 𝑋(𝑡)
𝑑𝑡 𝑋(𝑡) 𝑑𝑡 𝑋(𝑡)

𝑑𝑋(𝑡) 𝑋(𝑡) 𝑑𝑋(𝑡) 1

ሶ
𝑋𝑡 = = / 𝑋(𝑡)
𝑑𝑡 𝑋(𝑡) 𝑋(𝑡) 𝑑𝑡

𝑑𝑋(𝑡) 1
Catatan Growth = /
𝑋(𝑡) 𝑑𝑡

𝑑𝑙𝑛𝑋(𝑡) 𝑋ሶ 𝑡 𝑑𝑋(𝑡) 1
=Growth = = /
𝑑𝑡 𝑋(𝑡) 𝑋(𝑡) 𝑑𝑡

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𝑑𝑙𝑛𝑋(𝑡) 𝑋ሶ 𝑡 𝑑𝑋(𝑡) 1
=Growth = = /
𝑑𝑡 𝑋(𝑡) 𝑋(𝑡) 𝑑𝑡

𝑑𝑙𝑛𝐿(𝑡) 𝐿ሶ 𝑡 𝑑𝐿(𝑡) 1
= n = = /
𝑑𝑡 𝐿(𝑡) 𝐿(𝑡) 𝑑𝑡

𝑑𝑙𝑛𝐴(𝑡) 𝐴ሶ 𝑡 𝑑𝐴(𝑡) 1
= g = = /
𝑑𝑡 𝐴(𝑡) 𝐴(𝑡) 𝑑𝑡

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𝑑𝑙𝑛𝐿(𝑡) 𝑙𝑛𝐿 𝑡 −𝑙𝑛𝐿(0) 𝑑𝑙𝑛𝐴(𝑡) 𝑙𝑛𝐴 𝑡 −𝑙𝑛𝐴(0)

= = n = = g
𝑑𝑡 𝑡−0 𝑑𝑡 𝑡−0

𝑙𝑛𝐿 𝑡 = 𝑙𝑛𝐿(0) +nt 𝑙𝑛𝐴 𝑡 = 𝑙𝑛𝐴(0) +gt

L 𝑡 = 𝐿(0)𝑒 𝑛𝑡 A 𝑡 = 𝐴(0)𝑒 𝑔𝑡

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Specifically, the fraction of output devoted to investment is

exogenous and
constant. Thus, letting s denote that fraction, we have

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3
The Dynamics of the Model

ocus on the capital stock per unit of effective labor, k,

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The Dynamics of k Since k = K/AL : capital stock per unit of effective labor

𝑑𝑋(𝑡)
Hitung 𝑑𝑖𝑚𝑎𝑛𝑎 𝑋ሶ 𝑡 =
𝑑𝑡

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using the fact that Y/AL is given by f (k), we have
(1.19)
Equation (1.19) is the key equation of the Solow
model. It states that the rate of change of the capital
stock per unit of effective labor is the difference
between two terms.
The first, sf(k), is actual investment per unit of
effective labor: output per unit of effective labor is f (k),
and the fraction of that output that is invested is s.
The second term, (n + g + δ)k, is breakeven
investment, the amount of investment that must be
done just to keep k at its existing level.
Equation (1.19) is the key equation of the Solow model
f (k) : output per unit of effective labor
S : the fraction of that output that is invested
There are two reasons that some investment is
needed to prevent k from falling.
First, existing capital is depreciating; this capital
must be replaced to keep the capital stock from
falling. This is the δk term in (1.19).
Second, the quantity of effective labor is growing.
Thus doing enough investment to keep the capital
stock (K ) constant is not enough to keep the capital
stock per unit of effective labor (k) constant. Instead,
since the quantity of effective labor is growing at rate
n + g, the capital stock must grow at rate n + g to hold k
steady.9 This is the (n + g)k term in (1.19).
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The Inada conditions imply that at k = 0, f (k) is large

Actual investment, sf (k), is a constant times output per
unit of effective labor

actual investment break-even investment

the sf (k) line is steeper than the (n +g +δ)k line

Actual and break-even investment

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Actual investment, sf (k), is a constant times output per

unit of effective labor

actual investment break-even investment

Actual and break-even investment When actual investment falls short of

break-even investment, k is falling.
And when the two are equal, k is constant.

When actual investment per unit of

effective labor exceeds the investment
needed to break even, k is rising.
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The Inada conditions imply that at k = 0, f (k) is large

Actual investment, sf (k), is a constant times output per
unit of effective labor

actual investment
per unit break-even investment
of effective labor

Actual and break-even investment

k∗ is known as the golden-rule level of

the capital stock
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The Balanced Growth Path

The phase diagram for k in the Solow model

actual investment
per unit break-even investment
of effective labor

If k is initially less than k∗, actual investment

exceeds break-even investment

k exceeds k∗, k is negative

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The Balanced Growth Path

The phase diagram for k in the Solow model

actual investment
per unit break-even investment
of effective labor

Since k converges to k∗, it is natural to ask how the

variables of the model behave when k equals k∗. By
assumption, labor and knowledge are growing at rates n
and g, respectively. The capital stock, K, equals ALk;
since k is constant at k∗, K is growing at rate n + g (that is,
K/K equals n + g ). With both capital and effective labor If k is initially less than k∗, actual investment
growing at rate n + g, the assumption of constant returns exceeds break-even investment
implies that output, Y, is also growing at that rate. Finally,
capital per worker, K/L, and output per worker, Y/L, are k exceeds k∗, k is negative
growing at rate g.

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The Balanced Growth Path

The phase diagram for k in the Solow model

actual investment break-even investment

per unit
of effective labor

k∗ is defined by the condition that k = 0.

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4
The Impact of a Change in the Saving Rate

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The Impact of a Change in the Saving Rate

The Impact on Output

The increase in s shifts the actual

investment line upward, and so k∗
rises. This is shown in Figure 1.4. But
k does not immediately jump to the
new value of k∗. Initially, k is equal to
the old value of k∗. At this level, actual
investment now exceeds break-even
investment more resources are being
devoted to investment than are
needed to hold k constant and so k is
positive. Thus k begins to rise. It
continues to rise until it reaches the
new value of k∗, at which point it
Figure 1.4 The effects of an increase in the saving rate on
remains constant. investment
s
Sf(k) 30
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The Impact on Output

The increase in s shifts the actual investment line upward,

and so k∗ rises.
This is shown in Figure 1.4. But k does not immediately
jump to the new value of k∗. Initially, k is equal to the old
value of k∗. At this level, actual investment now exceeds
break-even investment more resources are being devoted
to investment than are needed to hold k constant and so k
is positive. Thus k begins to rise. It continues to rise until it
reaches the new value of k∗, at which point it remains
constant.

The effects of an increase in the saving rate on investment

k∗ is defined by the condition that k = 0.

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1
T0 denotes the time of the increase in the saving rate.

• Since the jump in s causes actual

investment to exceed break-even
investment by a strictly positive amount, k
jumps from zero to a strictly positive
amount. k rises gradually from the old
value of k∗ to the new value, and k falls
gradually back to zero

The effects of an increase in the saving rate

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4
The fourth and fifth panels of Figure 1.5 show how output
per worker responds to the rise in the saving rate. The
growth rate of output per worker, which is initially g, jumps
upward at t0 and then gradually returns to its initial level.
Thus output per worker begins to rise above the path it
5 was on and gradually settles into a higher path parallel to
the first

The Impact on Consumption

6
consumption per unit of effective
labor, c, equals output per unit of effective labor, f (k),
times the fraction
of that output that is consumed, 1 − s
The effects of an increase in the saving rate

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The Impact on Consumption
consumption per unit of effective labor, c,
equals output per unit of effective labor, f
(k), times the fraction of that output that is
consumed , 1 − s
Since s changes discontinuously at t0
and k does not, initially c jumps
downward. It then rises gradually as
k rises and s remains at its higher
level. This is shown in the last panel
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Let c∗ denote consumption per unit of effective

labor on the balanced growth path

c∗ equals output per unit of effective labor, f (k∗),

minus investment per unit of effective labor, sf (k∗)

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The figure shows not only (n +g +δ)k and sf (k), but also f
(k).

figure shows the determinants of c∗ for three different

values of s (and hence three different values of k∗).
SH : High
SM : Middle
SL : Low
s is high

Output, investment, and consumption on the balanced

growth path
FIGURE 1.6 k∗ is known as the golden-rule level of
the capital stock

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The Impact on Consumption

figure shows the determinants of c∗ for three different
values of s (and hence three different values of k∗).
SH : High
SM : Middle
SL : Low

s is Middle

Output, investment, and consumption on the balanced

growth path
FIGURE 1.6

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Quantitative Implications

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The Effect on Output in the Long Run

k∗ is defined by the condition that k = 0.

where y∗ = f (k∗) is the level of output per unit of effective

labor on the
balanced growth path.

Thus to find ∂y∗ /∂s, we need to find ∂k∗ /∂s. To do this,

note that k∗ is defined by the condition that k = 0. Thus k∗
satisfies

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Substituting
convert it to an elasticity by multiplying both sides by s/y∗

elasticity

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output equals ALf (k) and k equals K/AL, the

marginal product of capital, ∂Y/∂K, is ALf (k)[1/(AL)],
or just f (k).

Capital earns its The share of total income

marginal product, the total amount earned by that goes to capital on the balanced growth
capital (per unit of effective path is then k∗f (k∗)/f (k∗), or
labor) on the balanced growth path is k∗f (k∗) αK (k∗)

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The Speed of Convergence

Deret Taylor

f 0 ( x0 ) f 1
( x ) f 2
( x ) f n
( x0 )
f ( x)  ( x0  x) 
0 0
( x0  x) 
1 0
( x0  x)  ... 
2
( x0  x)n
0! 1! 2! n!
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𝑑𝑘(𝑡)
(1.30) 𝑑𝑖𝑚𝑎𝑛𝑎 𝑘ሶ 𝑡 =
𝑑𝑡

Persamaan difference Equation

Equation (1.30) implies that in the vicinity of the balanced
growth path, k moves toward k∗ at a speed approximately
proportional to its distance from k∗.

yt = [y0 - b/a]e -at + b/a

yt = [y0 - b/a]e –at + b/a

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y/t + ay = b
Penyelesaian umum adalah :
Kasus Non Homogen
didapatkan jika w(t) : adalah konstan (b) yt = yc + yp : = Ae -at + b/a (dimana a0)
dengan nilai bukan nol.

y/t + ay = b Penyelesaian definit adalah :

y0 = Ae –a0 + b/a = A + b/a

Fungsi komplementer yc : yt = Ae-at y0 = A + b/a
atau
A = y0 - b/a
Fungsi partikular yp : b/a

yt = [y0 - b/a]e -at + b/a

yt = [y0 - b/a]e –at + b/a

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(1.19)

for k with respect to k and evaluating the resulting expression at k = k∗ yields

Thus, k converges
to its balanced-growth-path
value at rate [1−αK (k∗)](n +g +δ).

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Growth Accounting

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Growth Accounting

The Solow residual is sometimes interpreted as a

Solow measure of the contribution of technological
Rfesid progress.
ual
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This basic framework can be extended in many ways. The

most common extensions are to consider different types
of capital and labor and to adjust for changes in the quality
of inputs.

Growth accounting only examines the immediate

determinants of growth:

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Convergence
An issue that has attracted considerable attention in empirical work
on growth is whether poor countries tend to grow faster than rich
countries

• Do poorer countries “catch up” to rich ones?

• Three reasons why the should
• The Solow model tells us everyone ends up at the steady
state on a balanced growth path
• Capital should migrate to poor countries because rates of
return should be higher there
• New technologies tend to get adopted first in richer
countries, with poorer ones catching up later

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• The evidence is spotty – strong in some contexts and

weak in others
• Baumol ‘86 showed that growth rates are negatively
related to initial income
• DeLong ’88 showed that Baumol’s evidence didn’t
hold up with:
• A more complete sample (that dropped Japan)
• Not robust to (likely) measurement errors

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• If there is convergence at all, it seems to be club

convergence
• Convergence seems to occur as predicted in “clubs” that
have a lot in common – like U.S. states
• Without club convergence, there doesn’t seem to be
convergence at all
• This suggests the Solow model is missing something
• The “club” concept suggests that shared institutions might
be important

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BIASED

In this sample, per capita income today is essentially unrelated to its level 100 years ago

DeLong (1988) demonstrates, however, that Baumol’s

finding is largely
spurious. There are two problems. The first is sample
selection. Since historical
data are constructed retrospectively, the countries that
have long data series
are generally those that are the most industrialized today.
Thus countries
that were not rich 100 years ago are typically in the
sample only if they
grew rapidly over the next 100 years.

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This causes him to add seven countries to

Baumol’s list (Argentina, Chile,
East Germany, Ireland, New Zealand,
Portugal, and Spain) and to drop one
(Japan).

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Natural Resources and Land: A Baseline Case

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We can now differentiate both sides of this expression

with respect to time.
Using the fact that the time derivative of the log of a
variable equals the
variable’s growth rate, we obtain

The growth rates of R, T, A, and L

are −b, 0, g, and n, respectively. Thus (1.46) simplifies to

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Imposing gK =gY
Equation (1.48) implies that the growth rate of output per
worker on the balanced growth path is

(1.48)

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