Macroeconomics

Lecture 17: growth theory, part two – Solow model

with technological progress

Yunho Cho

Spring, 2024
This lecture

• Technical change and growth

– Blanchard, Chapter 12.1-12.2

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Technological progress in Solow model

• Standard Solow model (without technological progress) predicts

that capital accumulation cannot achieve long-run growth

• Sustained growth requires technological progress

• What is the role of technological progress on growth?

• In an economy with both capital accumulation and technological

progress, at what rate would output grow?

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Production function with technological progress

• Refer to the state of technology as a variable describing how much

output produced from given capital and labor

• For convenience, assume labor-augmented production function

Y = F (K, AN )

which implies technology improves efficiency of labor. AN can be

thought of effective labor

• Assume constant returns to scale, i.e., if both inputs scaled by

common factor x > 0 then

F (xK, xAN ) = xF (K, AN )

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Intensive form

• Detrend model by writing in terms of efficiency units

Y K
y≡ and k≡
AN AN
• Using constant return to scale
 
Y F (K, AN ) K
y= = =F ,1 = F (k, 1) ≡ f (k)
AN AN AN
• Intensive version of the production function

y = f (k), f ′ (k) > 0, f ′′ (k) < 0

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Production function

Due to diminishing returns to capital, increases in capital per effective worker

lead to smaller and smaller increases in output per effective worker

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Output and capital accumulation

• National savings exogenous fraction of output

S = sY, 0<s<1

• In a closed economy, investment is given by

I = S = sY = sF (K, AN )

• Physical capital depreciates at rate δ

Kt+1 = (1 − δ)Kt + It
• For simplicity, assume that productivity grows at rate gA and labor
grows at rate gN

⇒ growth rate of effective labor (AN ) equals gA + gN

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Output and capital accumulation

• Putting all this together, capital accumulation becomes

Kt+1 = sF (Kt , At Nt ) + (1 − δ)Kt

• Divide both sides by At+1 Nt+1

Kt+1 F (Kt , At Nt ) Kt
=s + (1 − δ)
At+1 Nt+1 At+1 Nt+1 At+1 Nt+1
• Under intensive form
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kt+1 = [sf (kt ) + (1 − δ)kt ]
(1 + gA + gN )

This equation describes how capital per effective worker evolves

over time

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Steady-state capital and output

• Capital accumulation per effective worker

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kt+1 = [sf (kt ) + (1 − δ)kt ]
(1 + gA + gN )
• Steady state where capital per effective worker not changing

kt+1 = kt = k ∗ ⇔ sf (k ∗ ) = (δ + gA + gN )k ∗

Call this value k ∗ steady-state capital per effective worker

• Implies steady-state output per effective worker

y ∗ = f (k ∗ )

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Solow diagram

Capital per effective worker and output per effective worker converge to
constant values in the long run.

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Balanced growth

If Y /AN is constant, Y must grow at the same rate as AN . So, it must grow at
rate gA + gN (known as balanced growth). The growth rate of Y /N is equal to
the growth rate of Y minus the growth rate of N So the growth rate of Y /N is
given by gY − gN = (gA + gN ) − gN = gA .
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Next lecture

• Productivity and institutions

– Blanchard, Chapter 12.3

• Growth accounting

– Blanchard, Appendix to Chapter 12

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