Theory of economic growth

demand for goods

The
supply a : determine how much output is produced

y
=
f(k) =

The
supply goods
or

&
production function Note :
y
=
# output per worker

k
= capital per worker

The slope of this production function shows how much extra output a worker
produces when given an extra unit of capital. MPK + 1) =
8(k -

I/K)
y =
((k) --
> How much output the
economy produces
The demand of goods y= c + i
(y : output per worker ; c : consumption/worker; i: If worker
a
consumption function
(1 s)y c +i
y
=
-
=
c

Note
=>
yi
-
(1-s)y + i

; => =
Sy
-

Save a
fac tions
of 1-s income
Is Rate 10-s < 1)
consume a
faction :
Saving
saving rate s determines the allocation of that output btw consumption & investment

Growth in capital stock a

steady state
two forces influence the capital stock: investment and depre- ciation. Investment is expenditure
on new plant and equipment, and it causes the capital stock to rise. Depreciation is the wearing
out of old capital due to aging and use, and it causes the capital stock to fall

Changes in capital stock = Investment -

Depreciation
Ak = i Sk
Itk S
8/k)-sk
= the
steady state represent the
long run equi of the economy
 -
economy at the steady state will
stay there.
~ an economy not at the steady state
will go there.
- regardless of the level of capital
with which the economy begins, it
ends up with the steady-state level
of capital.

i) Sk >
-
kF >
-

yf
+
output
*
level
④
Finding the
steady state
of capital per worker k

sk =
Sf(k)-Sk
sf(k
=

0 = -Sk

⑤=
How
savng affects growth
The Solow model shows that the saving rate is a key determinant of the steady-state capital stock. If the saving
rate is high, the economy will have a large capital stock and a high level of output in the steady state. If the
saving rate is low, the economy will have a small capital stock and a low level of output in the steady state.

SF +
sf(k) ave
shifts upwald > ↓
-

↑ >
-
/ko Sk are
unchanged) i Sk
b until
>
-

steady state with higher k

higher
output
The Golden Rule levelof capital
Comp
the ordingsteady statthe highest possible consumption/person
-

(# -s)f e
*
↑ : < =

+
gold = the golden rule level
of capital ,
the
"
steady state value h
of that maximizes consumption
,*
*
c
y
-

thesteady state so k
*
=
flk-SK -
in
= 0

k
* output
↑ /
-Sk
below k outputk
*
so
gold

c*= f(k*) − S k* is biggest where the

slope of the production function equals the slope of the depreciation line:
MPK = S

SY - k4 + output" depreciation y
>
-

* *
↳ >k gold

<k
*

gold
*
k
POPLILATION GROWTH

The
steady state with population growth
The
effect of population growth