NotesontheSolowModel.PDF

Notes on the Solow Model Pengfei Wang Hong Kong University of Science and Technology 2010 pfwang (Institute) Notes on the Solow Model 03/09 1 / 32 Introduction: Basic Facts about Economic Growth Small di¤erence in growth rate can make large di¤erence in income in the long run. pfwang (Institute) Notes on the Solow Model 03/09 2 / 32 Introduction: Basic Facts about Economic Growth (continued) pfwang (Institute) Notes on the Solow Model 03/09 3 / 32 Questions to be Addressed How important is the rate of capital accumulation to a nation’s economic growth? What are the economic forces that ultimately allow poor countries to catch up with the richest countries in living standards? How does a nation’sgrowth rate evolve over time? Is there a limit? If so, what determines the limit — the rate of saving? the rate of population growth? or the amount of natural resources? pfwang (Institute) Notes on the Solow Model 03/09 4 / 32 Assumption There is only a single good, so relative prices do not play any role; There is no money and no government spending, so government does not play any role; Full employment at all time, so unemployment does not matter; Except inputs, the production technology does not change over time; There are only two types of inputs: capital and labor; The rates of saving, depreciation, population growth, and technology progress are constant. These features are both defects and virtues of the model. pfwang (Institute) Notes on the Solow Model 03/09 5 / 32 Assumption (continued) More speci…cally and mathematically, we have Production function Y = F (Kt , At Lt )