Question 1

Cobb-Douglas
Y AK aL(1-a) where A> 0 is the level of the technology and a is a constant with 0 <a« 1.
The Cobb-Douglas function can be written in intensive form as
y Aka
The change in the capital stock over time is given by equation .
If we divide both sides of this equation by L, we get
KL=s f(k) -õk
The right-hand side contains per capita variables only, but the left-hand side does not. Hence, it
is not an ordinary differential equation that can be easily solved. In order to transform it into a
differential equation in terms of k, we can take the derivative of k = KlL with respect to time to
get
k' d(K/L) dt = K' /L - nk where n =L' L. If we substitute this result into the expression for K

L, we can rearrange terms to get

k'$ f (k) - (n +3) k

The steady-state capital-labor ratio is determined from equation

as k* = [s AW(n + 8)] 1/(1-a).
Output at the steady state is
y* A1/(1-a) [s/(n+ö)]a/(1-a)
Note that, as we saw graphically for a more general production function f (K), k* rises with the
saving rate s and the level of technology A, and falls with the rate of population growth n and the
depreciation rate .
The steady-state level of output per capita is given by y* A1/(1-a) [s/(n + ö)) al(1-a) Thus y*
is a positive function ofs and A, and a negative function of n and 8. Along the transition, the
growth rate of k is given from equation by k'/k = s Ak-(1-a) - (n + 3 ) (1.28) If k{0) « k*, then k'/k

in equation is positive. This growth rate declines as k rises and approaches 0 as k approaches
k*. Since equation implies y'ly = a (k'/Tk), the behavior of y'y mimics that of k'k. In particular,

the lower y(0), the higher y'ly.

Note that, as we saw graphically for a more general production function f(k), k* rises with the
saving rate s and the level of technology A, and falls with the rate of population growth n and the
depreciation rate ö. The steady-state level of output per capita is given by
y A1/(1-a) [s/(n +õ)Ja/(1-a)
We can see that increasing s increases economy but we cant do that forever since s have have
bound.Max value is 1,There for we can't increase it further it leads to a steady state in long
term.Therefore we cant get growth forever.
 QUESTION-2
The Solow-Swan model with Labor-Augmenting Technological progress

Suppose T() grows at a constant rate x.

Condition for change in capital stock is

K = s . F[K, L. T(O] - õK--1

Dividing both sides by L,

s . Fk, TN- + n)k--2

Divide both sides by k to get

Rk = s. F{k, T¢)Yk - (3 * n) - 3

Let us now compute the growth rate of k in the steady-state.

We know that in steady-state growth rate (kIk) * is constant. Because s, n and ö are constantss

In equation 3 we can see that the average product of capital F[k, T/k must also be a constant
at the steady-state. Because of CRS, avg. product equals F{1, T(Yk] and is constant only if TV)
and k grow at the same rate, i.e. (KIR) * = x.

Output per capita is given by

y= F. TON=k. F[1, TOVA

TUk is constant, k grows at the rate x, thus output per workery also grows at the rate x. Sincee
C(1-s).y, the steady-state growth rate of c also equals x.

Lets see the transitional dynamics of the model with technical progress,

let us rewrite the system in terms of variables that remain constant in the steadystate.
Efective amount of labor is L= L. T().
Capital per unit of effective labor is k=k T\) = K{L. TON
Output per unit of effective labor is ý= Y[L. T(O] = F(R, 1)=f().

Using intensive forms and using the condition that A(t) grows at the rate x, the dynamic equation
for R can be written asS

kIR = s. JR) R- (x +n+6) - 4

The term (r+ n+ 8) is now the effective depreciation rate for k.

This means, if saving rate is zero, k would decline partly due to the depreciation of K at rate ð
and partly due to the rate of growth of L'i.e. (n+x). Steady-state growth rate of R is zero. The
steady-state value k* satisfies the condition

) (x +
6). R -5
s. JR +
=
n

At steady-state, k, $, ê are const.

k, y, c grow at the exogenous rate of technological progress.
K, Y, C grow at the rate n+x.
 The key property of this particular class of endogenous growth models is absence
of diminishing
returns to capital. The simplest form of a
production function which ensures absence of
diminishing returns to capital is the AK function,
given by

Y=AK -1
where A is a
positive constant that reflects the level of technology. The idea behind no
diminishing returns becomes more plausible if we think of K in a broad sense to include human
capital. Per capita output is given by y Ak which implies that
=
and
capital are fixed at A>0.
average marginal products to

Substituting f(k)/k=A in equation 1, we get

kIk= sA -(n +
6)
In order to establish that per capita growth can take place without technical progress, we
assume x=0.

Since the two schedules are parallel, k/k" is a constant and, in

particular, independent of k. k
always grows at the steady state rate (k/k ) sA- (n+8).

Since y=AK, y/y' = klk at every point in time. Also since c=(1-s)y, cle =
kik also applies. Thus all
per capita variables grow at the same constant rate given by

SA-(n+3) -2
An economy described by AK technology can display long run +ve per capita growth without

any technical progress. Theoflong run

per capita growth rate, shown in equation 2, depends on
the model. Unlike the neoclassical model, a higher saving rate
the behavioral
to a
parameters
rate of
leads higher long
run If
per capita growth. the level of technology A improves once
and for all, or if
elimination of Govt. distortion efectively raises
A, then the
long run growth rate
is higher. Changes in rates of depreciation and population growth rate also have permanent
effects on the per capita growth rate. Unlike the neo-classical model, the AK formulation does
not predict absolute or conditional convergence, i.e. dy ly') a0) = 0 for all y