Neoclassical growth model
- Model growth of GDP per worker via capital accumulation
- Key elements:
- Production function (GDP depends on technology, labour and physical capital)
- Capital accumulation equation (change in net capital stock equals gross investment [=savings] less depreciation).
- Solow-Swan assume:
- diminishing returns to capital or labour (the ‘law’ of diminishing returns), and
- constant returns to scale (e.g. doubling K and L, doubles Y).
- For example, the Cobb-Douglas production function
- how does capital accumulation (net investment) affect growth?
- what is role of savings, depreciation and population growth?
- what is role of technology?
GDP per worker and k
Assume A and L constant (no technology growth or labour force growth)
Graphical analysis of
What happens if savings increased?
- raising saving increases k* and y*, but long run growth still zero (e.g. s1>s0 below)
- call this a “levels effect”
- growth increases in short run (as economy moves to new steady state), but no permanent ‘growth effect’.
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