1 / 24

Basic Solow Model Scott Baier

Basic Solow Model Scott Baier. Explaining Catch-up Growth. Key Aspects of the Solow Model . Saving gets channeled into investment Investment adds to the capital stock Each period some capital wears out with use. Simplest Solow Model. Assume that we save a constant amount (S= 50)

cree
Download Presentation

Basic Solow Model Scott Baier

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Basic Solow ModelScott Baier Explaining Catch-up Growth

  2. Key Aspects of the Solow Model • Saving gets channeled into investment • Investment adds to the capital stock • Each period some capital wears out with use.

  3. Simplest Solow Model • Assume that we save a constant amount (S= 50) • Assume an initial level of capital (K=300) • Assume 10% of the capital stock depreciates each period (Depreciation = d*K) • Observe how the capital stock changes each period

  4. Tabulation

  5. Tabulation

  6. Tabulation

  7. Tabulation

  8. Tabulation

  9. Tabulation

  10. Tabulation

  11. Tabulation

  12. Tabulation

  13. Key Observations • At some point, it will be the case that savings is exactly equal to investment and the capital stock reach a steady state. • When you are far away from the steady state, the capital stock grows faster. • More rapid growth in the capital stock implies more rapid growth in output.

  14. Steady State • When saving equals investment, the economy reaches a steady state and the capital stock stops growing. • Mathematically, the capital stock stops growing when: S = d*Kss Since we know S and d  Kss = s/d In our example, Kss = 50/.10 =500

  15. Simple Solow Model: Graphically

  16. Simple Solow Model: Graphically

  17. Simple Solow Model: Graphically

  18. Simple Solow Model: Graphically

  19. Solow Growth Model • Important Point: The steady state occurs where savings is equal to depreciation. • In the simple Solow Growth Model, S=d*K • Given values for S and d, we can find the steady-state value of K

  20. Solow Growth Model • It is unrealistic to assume that people save a constant amount. • It is more likely to be the case that saving is related to the level of income. • We assume that people save a constant fraction of income.

  21. Key Aspects of the Solow Model • Saving gets channeled into investment • Investment adds to the capital stock • Each period some capital wears out with use.

  22. Production Function

  23. Production Function and Saving Function

  24. Saving Function and Depreciation Schedule

More Related