Chapter 2: Growth Theory Preliminars

Advanced Macroeconomics
An Easy Guide

Campante, Sturzenegger & Velasco

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 Chapter 2: Growth Theory Preliminars

Why do we care about growth?

The evolution of the world GDP per capita over the years
1-2008

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 Chapter 2: Growth Theory Preliminars

Why do we care about growth?

Log GDP per capita of selected countries (1820-2018)

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 Chapter 2: Growth Theory Preliminars

Why do we care about growth?

Log GDP per capita of selected countries (1960-2018)

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 Chapter 2: Growth Theory Preliminars

The Kaldor Facts

1 Output per worker shows continuous growth,with no tendency

to fall.
2 The capital/output ratio is nearly constant.(But what is
capital?)
3 Capital per worker shows continuous growth(... follows from
the other two).
4 The rate of return on capital is nearly constant: (real interest
rates are flat).
5 Labour and capital receive constant shares of total income.
6 The growth rate of output per worker differs substantially
across countries(and over time, we can add, miracles and
disasters)

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 Chapter 2: Growth Theory Preliminars

The Solow Model

The Solow Model

Y = F (K , L, t) , (1)
K̇ = I − δK = s · F (K , L, t) − δK , (2)
Lt = e nt . (3)
Y = F (K , L). (4)

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 Chapter 2: Growth Theory Preliminars

The Solow Model

The (neoclassical) production function

Where K > 0 and L > 0, F (·) exhibits positive and diminishing
marginal products with respect to each input:

∂F ∂2F
> 0, <0
∂K ∂K 2
∂F ∂2F
> 0, < 0.
∂L ∂L2

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 Chapter 2: Growth Theory Preliminars

The Solow Model

F (·) exhibits constant returns to scale:

F (λK , λL) = λ · F (K , L) for all λ > 0.

and K and L satisfy the Inada conditions:

∂F ∂F
lim = lim = ∞,
K →0 ∂K L→0 ∂L
∂F ∂F
lim = lim = 0.
K →∞ ∂K L→∞ ∂L

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Y = F (K , L) (5)
y = f (k) (6)
Y = AK α L1−α (7)
y = Ak α (8)

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 Chapter 2: Growth Theory Preliminars

The Solow Model

The law of motion of capital

K̇ /L = s · f (k) − δk. (9)

d (K /L)
k̇ ≡ = K̇ /L − nk, (10)
dt
k̇ = s · f (k) − (n + δ) · k. (11)

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Dynamics in the Solow model

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Finding a balance growth path

s · f (k ∗ ) = (n + δ) · k ∗ . (12)
 1

∗ sA 1−α
k = . (13)
n+δ
  α
∗ 1 s 1−α
y =A 1−α · . (14)
n+δ

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Transition Dynamics

k̇ s · f (k)
γk ≡ = − (n + δ) . (15)
k k

ẏ k̇
= α = αγk . (16)
y k

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Dynamics in the Solow Model again

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Transition dynamics

d k̇
= s · f ′ (k) − (n + δ). (17)
dk

d k̇
= s · f ′ (k ∗ ) − (n + δ). (18)
dk
k=k ∗
 −1
d k̇ sA
= s · Aα − (n + δ) = (n + δ) (α − 1) (19)
dk n+δ
k=k ∗

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 Chapter 2: Growth Theory Preliminars

The Solow Model

The effect of an increase in the saving rate

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Dynamic Inefficiency

c ∗ (s) = f [k ∗ (s)] − (n + δ) · k ∗ . (20)

f ′ (kg ) = (n + δ) . (21)

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Feasible consumption

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 Chapter 2: Growth Theory Preliminars

The Solow Model

Absolute and conditional convergence

 
s ′ f (k)
∂γk /∂k = f (k) − < 0. (22)
k k

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 Chapter 2: Growth Theory Preliminars

Can the model account for income differentials?

  α
∗ 1 s 1−α
y =A 1−α (23)
n+δ
s  α
y∗ =
1−α
(24)
δ
α α
s1 1−α

 
y1 δ s1 1−α
=
α = (25)
y2 s2 1−α s2
δ
  α
∗ 1 s 1−α
y =A 1−α (26)
n+δ

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 Chapter 2: Growth Theory Preliminars

The Solow model with exogenous technological change

ẏ Ȧ k̇
= + α = a + αγk . (27)
y A k
On the BGP
ẏ
= a. (28)
y
Et = Lt · e λt = L0 · e (λ+n)t , (29)
Y = F (Kt , Et ) . (30)
K
k= . (31)
E

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 Chapter 2: Growth Theory Preliminars

The Solow model with exogenous technological change

So
k̇ K̇ Ė sy
= − = − δ − n − λ, (32)
k K E k
k̇ sf (k)
= − δ − n − λ, (33)
k k
k̇ = sf (k) − (δ + n + λ) k. (34)

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 Chapter 2: Growth Theory Preliminars

The Solow model with exogenous technological change

For k̇ = 0
sf (k)
= (δ + n + λ) . (35)
k
K̇ Ė Ẏ
= =n+λ= . (36)
K E Y
But then .
Y


L Ẏ L̇
Y
= − =λ (37)
L
Y L

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