ECON304 Macro Chapter 7

The economy is in a steady state when:

k=k'=k*

Competitive equilibrium in the Solow growth model:

kt+1 = szf(k)+(1−δ)k /1+n - determines the stock of capital per worker the next period k/ as a function of the current stock of capital per worker k

A steady state is a

long-run equilibrium

When we compare poor and rich countries in the world there is much greater dispersion in growth rates in per capita income for the ______ countries than for the ____ countries

poor; rich

Countries that have a higher population growth are often

poorer

Real per capita income and the investment rate are _______ correlated

positively

Recent evidence suggests that output per worker is _______ related to the rate investment and _____ related to the rate of population growth

positively; negatively

Countries that save more are often

richer

since capital per worker converges to a steady state value k*, output per worker also converges to

y*=zf(k*)

(Output is produced by a representative firm) production function:

Y=zF(K,N)

What are the key prediction of the Solow Growth Model?

1. sources of economic growth 2. what causes living standards to increase over time 3. what happens to the level and growth rate of aggregate income when the savings rate or the population growth rises 4. what we should observe happening to relative living standards across countries over time 5. technological process is necessary for sustained increases in standards of living

Typically, growing economies are experiencing growth in both:

1. the factors of production (capital and labor) and 2. the total factor productivity

On average, for the last 100 years or more, real GDP per capita in the US has increased by

2% per year

Constant consumption fraction of income in each period (consumer):

C=(1-s)Y C= current consumption s=savings rate Y= units of real output as income

growth rate of aggregate capital (&Y, C, S, I) is:

K'/K -1= n

Consumer population growth equation:

N'=(1+n)N

Real per capita income and the population growth rate are _________ correlated

Negatively

Which is more alike in terms of rates of growth? Rich or poor countries?

Rich countries

Current savings equation (consumer):

S=sY

The per-worker production funcion relates output per worker to

capital per worker

The Solow model says that if savings, S, the population growth, N, and the productivity, z, are constant, then the country _______ grow in the _____

does not; long-run (income per capita is constant)

In Solo's exogenous growth model, the steady-state growth rate of capital can be increased by

higher population growth

The savings rate has the following characteristic in Solow's exogenous growth model

it is constant

It is useful to study the Solow growth model because

it is useful in understanding the sources of economic growth after 1800

In the steady state, per capita savings are equal to per capita investment formula:

szf(k)=(n+ δ)k

In Solo's model of economic growth, suppose that s represents the savings rate, z represents total factor productivity, k represents the level of capital per worker, and f(k) represents the per-worker production function. Also supposed that n represents the population growth rate and d represents the depreciation rate of capital. The equilibrium level of capital per worker, k*, will satisfy the equation

szf(k*)=(n+d)k*

Output per worker (real income per capita):

y=zf(k)