宏观经济SOLOW_GROWTH_MODEL.doc

SOLOW GROWTH MODEL Start with a Constant Returns to Scale (CRTS) production function: Y = f (K,L). CRTS implies that by multiplying each input by some factor “z”, output changes by a multiple of that same factor: zY? = f ( zK, zL) In this case, let z = 1/L. That means: Y * 1/L = f (K * 1/L, L * 1/L) or Y/L = f (K/L, 1) define y = Y/L and k = K/L, so that the production function can now be written as y = f (k), where y is output per worker and k is capital per worker. A graphical depiction of the production relation is: The production function shows the production of goods. We now look at the demand for goods. The demand for goods, in this simple model, consists of consumption plus investment: y = c + i where y = Y/L; c = C/L; and i = I/L. Investment, as always, creates additions to the capital stock. The consumption function in this simple model is: C = (1 – s) Y, which can be rewritten as c = (1 – s) y, where “s” is the savings rate and 0 s 1. Going back to the demand for goods, y = c + i, we can rewrite this as y = (1 – s) y + i y = y – sy + i so, y – y – sy = i which means that sy = i: savings equals investment. We can now put our knowledge to use by looking at a simple model of growth. Investment adds to the capital stock (investment is created through savings): i = sy = s f(k) The higher the level of output, the greater the amount of investment: Assume that a certain amount of capital stock is consumed each period: depreciation takes away from the capital stock. Let “?“be the depreciation rate. That means that each period ?*k is the amount of capital that is “consumed” (i.e., used up): We can now look at the effect of both investment and depreciation on the capital stock: ?k = i – ?k, which is stating that the stock of capital increases due to additions (created by investment) and decreases due to subtractions (caused by depreciation). This can be rewritten as ?k =s* f(k) – ?k. The steady state level of capital stock is the stock of capital at which inves