Presentation is loading. Please wait.

Presentation is loading. Please wait.

@K.R.Bhattarai, Business School, University of Hull, UK. 1 Economic Modelling Lecture 3 Steady State and Golden Rule of Saving in Solow Model.

Similar presentations


Presentation on theme: "@K.R.Bhattarai, Business School, University of Hull, UK. 1 Economic Modelling Lecture 3 Steady State and Golden Rule of Saving in Solow Model."— Presentation transcript:

1 @K.R.Bhattarai, Business School, University of Hull, UK. 1 Economic Modelling Lecture 3 Steady State and Golden Rule of Saving in Solow Model

2 @K.R.Bhattarai, Business School, University of Hull, UK. 2 Solow Growth Model Production function with capital and labour as its inputs: (Close Economy without Government) Market clearing: Households Saving: Investment requirement: Closure rule: Dynamics: Capital accumulation: Firms Production Function

3 @K.R.Bhattarai, Business School, University of Hull, UK. 3 Per Capita Output and Per Capita Capital Stock in the Steady State 0.5ksks SST

4 @K.R.Bhattarai, Business School, University of Hull, UK. 4 Capital Stock and output in the Steady State in the Solow Model Differentiate it with respect to time to get growth rate of k : Fundamental equation of economic growth: Per Capita Capital Stock Take log both sides

5 @K.R.Bhattarai, Business School, University of Hull, UK. 5 Capital Stock and output in the Steady State in the Solow Model Fundamental equation of economic growth: Per Capita Capital Stock in the Steady State: Per Capita Output in the Steady State:

6 @K.R.Bhattarai, Business School, University of Hull, UK. 6 Solow Growth Model Production function with Labour augmenting technology (Close Economy without Government) Market clearing: Households Saving: Investment requirement: Closure rule: Dynamics: Capital accumulation: Firms Production Function

7 @K.R.Bhattarai, Business School, University of Hull, UK. 7 Capital Stock and output in the Steady State in the Solow Model with technical progress Differentiate it with respect to time to get growth rate of k : Fundamental equation of economic growth: Per Capita Effective Capital Stock Take log both sides

8 @K.R.Bhattarai, Business School, University of Hull, UK. 8 Capital Stock and output in the Steady State in the Solow Model with technical progress Fundamental equation of economic growth: Per Capita Effective Capital Stock in the Steady State: Per Capita Effective Output in the Steady State:

9 @K.R.Bhattarai, Business School, University of Hull, UK. 9 Results from the steady state: 1.Countries with higher saving rate have higher steady state level of output and countries with lower saving rate have lower level of output in the steady state. 2.Countries with higher level of technology have higher level of output and countries with lower level of technology have lower level of output in the steady state. 3.Countries with higher rate of population growth rate have lower level of output in the steady state. 4.Countries with higher capital share have higher output in the steady state. 5.Countries which differ in the initial capital stock eventually reach to the same output level in the steady state. 6.Growth of per capita income is zero in the steady state

10 @K.R.Bhattarai, Business School, University of Hull, UK. 10 Calculation of Steady State: A Numerical Example Output in the steady state = (2) = Consumption in the steady state:

11 @K.R.Bhattarai, Business School, University of Hull, UK. 11 How does a higher saving rate affect the level of output in the steady state? Low saving country High saving country Note: Saving rate affects level of income but not the growth rates.

12 @K.R.Bhattarai, Business School, University of Hull, UK. 12 How does a higher rate of population growth affect the level of output in the steady state? Low saving country High saving country Higher population growth rate means lower output and capital stock in the steady state

13 @K.R.Bhattarai, Business School, University of Hull, UK. 13 Golden Rule for Saving and Capital Accumulation Kss Kg C-max Golden rule Steady State

14 @K.R.Bhattarai, Business School, University of Hull, UK. 14 Saving rate C-max = 1.25 Consumption s*=0.5 y=2.5 k = 25 y = 0.5*k 0.5 s1s2 s4 s5 How High Should be the Saving Rate? Saving Rate that Maximises Consumption C

15 @K.R.Bhattarai, Business School, University of Hull, UK. 15 Golden Rule of Saving Golden Rule Steady State

16 @K.R.Bhattarai, Business School, University of Hull, UK. 16 Reading and References Text: Blanchard Chapters 10, 11 Mankiw 7 Burda Wypslosz 3 Miles and Scot 5-6 Jones, Charles (CJ) Introduction to economic growth, 2002, 2nd Edition, Norton. Articles: Freeman Richard Kaldor N. (1961) Capital Accumulation and Economic Growth in F.A. Lutz and D.C. Hague ed. The Theory of Capital, New York, St. Martin. Lucas R.E. (1988) "On the Mechanics of Economic Development", Journal of Monetary Economics, 22, Mankiw N.G., D. Romer and D. N. Weil (1992) Contribution to the Empirics of Economic Growth Quarterly Journal of Economics, Parente S.L. and Prescott E. C. (1993) Changes in the Wealth of Nations, Federal Reserve Bank of Minneapolis, Quarterly Review, Spring, pp Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy, vol. 98, no. 5. Pt. 2, pp. S71-S102. Temple, Jonathan R. W. and Voth, Hans-Joachim (1998). Human capital, equipment investment, and industrialization. European Economic Review, 42(7), July, Human capital, equipment investment, and industrialization


Download ppt "@K.R.Bhattarai, Business School, University of Hull, UK. 1 Economic Modelling Lecture 3 Steady State and Golden Rule of Saving in Solow Model."

Similar presentations


Ads by Google