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

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

@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.

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.

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

@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.

@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.

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

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

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

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.

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.

@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.

@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.

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.

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.

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.

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.

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.

Readings and References Solow, Robert M. (1956) A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, pp.65-95. Blanchard (10, 11) Mankiw (7) Burda Wyplosz (3) Miles and Scot (5-6) Relevant web page: http://www.bris.ac.uk/Depts/Economics/Growth/ @K.R.Bhattarai, Business School, University of Hull.