Professional Documents
Culture Documents
7
Economic Growth I:
Capital Accumulation and
Population Growth
MACROECONOMICS
1
Income and poverty in the world
selected countries, 2000
100
Madagascar
90
India
living on $2 per day or less
80 Nepal
70 Bangladesh
% of population
60 Kenya Botswana
50 China
40 Peru
Mexico
30 Thailand
20
Brazil Russian Chile
10
S. Korea
Federation
0
$0 $5,000 $10,000 $15,000 $20,000
Income per capita in dollars
2
The lessons of growth theory
…can make a positive difference in the lives of
hundreds of millions of people.
These lessons help us
understand why poor
countries are poor
design policies that
can help them grow
learn how our own
growth rate is affected
by shocks and our
government’s policies
3
How Solow model is different
from Chapter 3’s model
4. no G or T
(only to simplify presentation;
we can still do fiscal policy experiments)
5. cosmetic differences
Capital per
worker, k
CHAPTER 7 Economic Growth I slide 11
4
The national income identity
Y=C+I (remember, no G )
In “per worker” terms:
y=c+i
where c = C/L and i = I /L
5
Output, consumption, and investment
c1
y1 sf(k)
i1
k1 Capital per
worker, k
CHAPTER 7 Economic Growth I slide 15
Depreciation
k
1
Capital per
worker, k
CHAPTER 7 Economic Growth I slide 16
Capital accumulation
k = s f(k) – k
6
The equation of motion for k
k = s f(k) – k
The Solow model’s central equation
Determines behavior of capital over time…
…which, in turn, determines behavior of
all of the other endogenous variables
because they all depend on k. E.g.,
income per person: y = f(k)
consumption per person: c = (1–s) f(k)
k = s f(k) – k
If investment is just enough to cover depreciation
[sf(k) = k ],
then capital per worker will remain constant:
k = 0.
Investment
and k
depreciation
sf(k)
k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 20
7
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
investment
depreciation
k1 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 21
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
k1 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 22
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
k1 k2 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 23
8
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
investment
depreciation
k2 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 24
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
k2 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 25
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
k2 k3 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 26
9
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
Summary: sf(k)
As long as k < k*,
investment will exceed
depreciation,
and k will continue to
grow toward k*.
k3 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 27
A numerical example
10
A numerical example, cont.
Assume:
s = 0.3
= 0.1
initial value of k = 4.0
Continue to assume
s = 0.3, = 0.1, and y = k 1/2
11
Solution to exercise:
k*
3 k*
k*
Solve to get: k * 9 and y * k * 3
k
k 1* k 2*
CHAPTER 7 Economic Growth I slide 34
Prediction:
12
International evidence on investment
rates and income per person
Income per 100,000
person in
2000
(log scale)
10,000
1,000
100
0 5 10 15 20 25 30 35
Investment as percentage of output
(average 1960-2000)
CHAPTER 7 Economic Growth I slide 36
13
The Golden Rule capital stock
steady state
output and
depreciation k*
Then, graph
f(k*) and k*,
f(k*)
look for the
point where
*
the gap between c gold
them is biggest.
* *
i gold k gold
* *
y gold f (k gold ) *
k gold steady-state
capital per
worker, k*
CHAPTER 7 Economic Growth I slide 39
MPK =
*
k gold steady-state
capital per
worker, k*
CHAPTER 7 Economic Growth I slide 40
14
Starting with too much capital
If k * k gold
*
then increasing c* y
requires a fall in s.
In the transition to c
the Golden Rule,
consumption is i
higher at all points
in time.
t0 time
If k * k gold
*
then increasing c*
requires an y
increase in s. c
Future generations
enjoy higher
consumption,
but the current i
one experiences
an initial drop t0 time
in consumption.
CHAPTER 7 Economic Growth I slide 43
Population growth
15
Break-even investment
k = s f(k) ( + n) k
actual
break-even
investment
investment
Investment,
k = s f(k) ( +n)k
break-even
investment
( + n ) k
sf(k)
k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 47
16
The impact of population growth
Investment,
break-even ( +n2) k
investment
( +n1) k
An increase in n
causes an sf(k)
increase in break-
even investment,
leading to a lower
steady-state level
of k.
Prediction:
1,000
100
0 1 2 3 4 5
Population Growth
(percent per year; average 1960-2000)
CHAPTER 7 Economic Growth I slide 50
17
The Golden Rule with population
growth
To find the Golden Rule capital stock,
express c* in terms of k*:
c* = y* i*
= f (k* ) ( + n) k*
In the Golden
c* is maximized when Rule steady state,
MPK = + n the marginal product
of capital net of
or equivalently, depreciation equals
MPK = n the population
growth rate.
CHAPTER 7 Economic Growth I slide 51
Alternative perspectives on
population growth
The Malthusian Model (1798)
Predicts population growth will outstrip the Earth’s
ability to produce food, leading to the
impoverishment of humanity.
Since Malthus, world population has increased
sixfold, yet living standards are higher than ever.
Malthus omitted the effects of technological
progress.
Alternative perspectives on
population growth
The Kremerian Model (1993)
Posits that population growth contributes to
economic growth.
More people = more geniuses, scientists &
engineers, so faster technological progress.
Evidence, from very long historical periods:
As world pop. growth rate increased, so did rate
of growth in living standards
Historically, regions with larger populations have
enjoyed faster growth.
CHAPTER 7 Economic Growth I slide 53
18
Chapter Summary
Chapter Summary
19