ch4.pptVIP

Macroeconomics Chapter 4 Key EquationsSolow Growth Model ?k/k= s· (y/k) ? sδ ? n 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. Solow Growth ModelSteady State s·(y*/k*)=sδ+n We assumed that everything on the right-hand side was constant except for y/k. 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. Solow Growth ModelChange in savings rate (s) Solow Growth ModelChange in savings rate (s) In the short run, an increase in the saving rate raises the growth rate of capital per worker. This growth rate remains higher during the transition to the steady state. Solow Growth ModelChange in savings rate (s) In the long run, the growth rate of capital per worker is the same—zero—for any saving rate. In this long-run or steady-state situation, a higher saving rate leads to higher steady state capital per worker, k?, not to a change in the growth rate (which remains at zero). A·f(k*)/k*=δ+n/s Solow Growth Modelthe effect of s on consumptions In the short run, consumption decreases and k arises. c*=y*-δk*-s(y*-δk*) = y*-δk*-nk* ?c*= ?y*-(δ+n) ?k* = (MPK-δ-n) ?k* In the long run, whether the consumption in the steady state increases depends on MPK. “Golden Rule” Solow Growth ModelChange in technology level (A) Solow Growth ModelChange in technology level (A) In the short run, an increase in the technology level, A, raises the growth rates of capital and real GDP per worker. These growth rates remain higher during the transition to the steady state. Solow Growth ModelChange in technology level (A) In the long run, the growth rates of capital and real GDP per worker are the same—zero—for any technology level. In this long-run