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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