Outline of the Lecture
- Review of Solow Model.
- Development Accounting
- Going beyond Solow Model
- First part of the assignment presentation
Solow production function
- We begin with a production function and assume constant returns. Y=A .F(K,L) so… zY=F(zK,zL)
- By setting z=1/L we create a per worker function. Y/L=F(K/L,1)
- So, output per worker is a function of capital per worker. We write this as, y=f(k)
- The slope of this function is the marginal product of capital per worker. MPK = f(k+1)–f(k).
- It tells us the change in output per worker that results when we increase the capital per worker by one.
- The function of production of Solow model tell us how the variation output per worker is due to the variation of capital per worker . Y=F(k)
- Let us see how Solow explain the variation of capital .
- where k is capital per worker
- y is real gross domestic product (real GDP) per worker
- y/k is the average product of capital
- s is the saving rate
- δ is the depreciation rate
- n is the population growth rate.
- We assumed that everything on the right-hand side was constant except for y/k. We found that, in the transition to the steady state, the rise in k led to a fall in y/k and, hence, to a fall in ?k/k. In the steady state, k was constant and, therefore, y/k was constant. Hence, ?k/k was constant and equal to zero
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