ECON 3102 Intermediate Macroeconomics

Lecture 8

Seungyoon Jeong

University of Minnesota

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Introduction

Solow Growth Model

Comparative Statics

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Solow Growth Model

Developed by Robert Solow (1956)

The basis for the modern theory of economic growth
Exogenous growth model
A key prediction: technological progress is necessary for
sustained increases in standards of living

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Population Growth

Different from Malthus model, population grows exogenouely at a

rate n

N 0 = (1 + n)N

eg. n = 0.02. 100(1.02)=102

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Income-Expenditure Identity

The income expenditure identity holds as an equilibrium condition

Y =C +I

National income = Consumption + Investment

No government

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Consumption Savings Behavior

Consumers are assumed to save a constant fraction s of their

income, consuming the rest

C = (1 − s)Y

Unsaved portion of national income is consumption

This means

I = sY

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Law of the Motion for Capital

Future capital equals the capital remaining after depreciation, plus

current investment:

K 0 = (1 − δ)K + I

Tomorrow’s Capital = Today’s Leftover from depreciation + New

investment in the period

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Combining above relations

In equilibrium, future capital equals total savings (= I ) plus what

remains of current K

K 0 = (1 − δ)K + sY

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Production Side

Representative Firm’s Production Function

Y = zF (K , N)

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In tems of Per-Capita

Constant returns to scale imply

 
Y K
= zF ,1
N N
Re-write this

y = zf (k)

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Next, re-write the equilbrium LLM

By substituting in the production function

K 0 = (1 − δ)K + szF (K , N)

Similarly, express the equation in terms of per-capita

(1 + n)k 0 = szf (k) + (1 − δ)k

szf (k) (1 − δ)k
⇒ k0 = +
(1 + n) (1 + n)
Finally, we write a relational equation between k 0 and k

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Determination of the Steady State Quantity of Capital
per Worker

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Determination of the Steady State Quantity of Capital
per Worker

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Steady State Consumption per Worker

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Comparative Statics: (1) an Increase in s

In the steady state, this increases capital per worker and real
output per capita
In the steady state, there is no effect on the growth rates of
aggregate variables

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an Increase of Saving rate

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Transition of Steady-State

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Comparative Statics: (2) an Increase of population
growth rate

Capital per worker and output per worker decrease

There is no effect on the growth rates of aggregate variables

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Increase of population growth rate

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Comparative Statics: (3) an Increase of TFP z

Sustained increases in z cause sustained increases in per capita

income

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an Increase of TFP z

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Golden rule Saving rate

Golden rule saving rate: saving rate that maximizing current

consumption

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Golden Rule Saving Rate

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