1. Economic Modelling Lecture 2 Neoclassical Solow Growth Model
@K.R.Bhattarai, Business School, University of Hull.

2. @K.R.Bhattarai, Business School, University of Hull.

3. @K.R.Bhattarai, Business School, University of Hull.
Source: Hull University Network.
Start/Applications/Economics/ World Development Indicators 2002
@K.R.Bhattarai, Business School, University of Hull.

4. Growth Rate of Per Capita Income Growth Miracle Countries
Source: Hull University Network.
Start/Applications/Economics/ World Development Indicators 2002
@K.R.Bhattarai, Business School, University of Hull.

5. Growth ate of Per Capita Income In Growth Disaster Countries
@K.R.Bhattarai, Business School, University of Hull.
Source: Hull University Network.
Start/Applications/Economics/ World Development Indicators 2002

6. @K.R.Bhattarai, Business School, University of Hull.
Solow Growth Model
Production function with capital and labour as its inputs.
Closed Economy without Government.
Firm’s Production Function
Market clearing:
Household’s Saving Decision:
Investment requirement:
Closure rule in the model:
Dynamics: Capital accumulation:
@K.R.Bhattarai, Business School, University of Hull.

7. @K.R.Bhattarai, Business School, University of Hull.
Production Function Y
Total output K
Total capital stock
@K.R.Bhattarai, Business School, University of Hull.

8. Intensive Production Function
Per capita output
Per capita capital
@K.R.Bhattarai, Business School, University of Hull.

9. Saving and Production Functions
@K.R.Bhattarai, Business School, University of Hull.

10. Saving and Investment Functions
@K.R.Bhattarai, Business School, University of Hull.

11. Per Capita Output and Per Capita Capital Stock in the Steady State
Is and Ss
0.5ks ks
@K.R.Bhattarai, Business School, University of Hull.

12. Calculations of growth of Per Capita Output
Growth rate of Per Capita Output
If Y grows by 5 percent, Labour grows by 2% then
Similarly growth rate of Effective Per Capita Capital Stock
If K grows by 5%, labour grows by 2% , technology grows by 2 % then:
@K.R.Bhattarai, Business School, University of Hull.

13. @K.R.Bhattarai, Business School, University of Hull.
Growth Accounting
Take log of both sides:
Differentiate with respect to time :
@K.R.Bhattarai, Business School, University of Hull.

14. @K.R.Bhattarai, Business School, University of Hull.
Growth Accounting
Share of labour:
Share of capital:
= growth rate of labour input
@K.R.Bhattarai, Business School, University of Hull.

15. UK Needs Higher Growth Rate to Catch the US in Per Capita Income
51383
gus=2.05%
34100 US
guk=3.9%
Per capita income
33958 UK
23550
g=1.83%
time
2022
2002
@K.R.Bhattarai, Business School, University of Hull.

16. Time Taken to Multiply the Initial Income and to Bridge the Income Gap
a. Initial income
b. Income in period t:
c. Double of the initial income
d. n-times of the original income
Take logs both sides of in (c ) or (d) or
@K.R.Bhattarai, Business School, University of Hull.

17. Why Growth Rates Differ Across Countries?
Because of differences in
Capital Stock (Buildings, Transportation and Communication Networks, Machines)
Labour input (Health and education of working populations, their productive skills, knowledge)
Technology (knowledge on how to combine inputs in production; formula, design, software and management)
Economic Policy
Natural resources?
@K.R.Bhattarai, Business School, University of Hull.

18. Reasons for Growth Miracle
Higher saving and investment rates.
Higher rate of technology adoption.
Better economic policy: close co-operation between the public and the private sector.
Realistic Trade and exchange rate policies.
Control of population growth rate.
@K.R.Bhattarai, Business School, University of Hull.

19. Reasons for Growth Disasters
Low Saving and Investment Rates.
Higher level of inflation and economic uncertainty.
Negative real interest rates.
High population growth rates.
Low exports and more imports and trade and balance of payment imbalance.
Weak Governments.
@K.R.Bhattarai, Business School, University of Hull.

20. Readings and References
Solow, Robert M. (1956) A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, pp
Blanchard (10, 11)
Mankiw (7)
Burda Wyplosz (3)
Miles and Scot (5-6)
Relevant web page:
@K.R.Bhattarai, Business School, University of Hull.