Growth Determinants

Growth Determinants (1)

Savings and Investment: from the circular flow we see household and firms save part of their income. Savings flow in the financial system and channelled to borrowers (firms and households)
Questions: does more savings necessarily means more growth?

Aggregate production function Y=f(K,L)

  • Goods and services are produced using two factors of production. A production function is commonly used in microeconomics to describe how firms combine K and L. In this case, this is used to described the output production of the entire economy.

How do we finance investment?

  • Remember that (S-I)+(T-G)=(X-Z)

So investment can be financed
by private savings by firms and households (S)
by government savings
by net savings of foreigners
I=S+(T-G)+(Z-X)

  • We assume that T=G →the government does not run a deficit
  • We also assume Z=X → current account balance

Then I=S Investment is financed by domestic savings

  • However, old capital depreciates, the proportion of capital that is lost is called depreciation rate and usually indicated with δ
  • Definition of steady state

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2015-01-18T20:41:09+00:00 July 2nd, 2014|講義|