The document discusses economic growth models including the Harrod-Domar and Solow growth models. It explains that the Harrod-Domar model assumes saving is sufficient to fuel growth and investments are always positive, but it does not account for varying returns to capital or innovation over time. The Solow growth model incorporates a production function with diminishing returns to capital and a savings rate that determines investment, as well as depreciation of capital. It shows how an economy can reach a steady state of long-run equilibrium growth.

2. Economic
Development
Lecture 5
Growth

3. Questions?

4. Harrod-Domar Growth Model

5. Harrod-Domar Growth Model
Y =
K
v
g = (s/v) - d

6. Just add capital and
output increases
Harrod-Domar Growth Model

7. Problems
Assumes saving is sufficient
Not all investments are positive
Fixed v - no flexibility
Harrod-Domar Growth Model

8. Robert
Solow
Nobel
Prize
1987

9. Production Function
Labor
Capital
$100
10
$200
20
$300
50
1,000 Shoes

10. Production Function
Labor
Capital
$100
10
$200
20
$300
50
1,000 Shoes
2,000 Shoes

11. Y = F(K, L)
Per Worker
Y = F(K, L)
Solow Growth Model
L L L
y = f(k)

12. Y = F(K, L)
Per Worker
Y = F(K, L)
Solow Growth Model
L L L
y = f(k)

13. Rates of Return
Constant
Diminishing
Increasing

14. Rates of Return
Constant
Increasing
Decreasing

15. Production Function
k
Capital Per Worker
y
Output
Per
Worker 200
$10
225
$15
250
$30
Diminishing Returns
Increasing at a Decreasing Rate

16. Production Function
200
$10
225
250
Innovation
Increase in Productivity
Shift out the Production Function
k
Capital Per Worker
y
Output
Per
Worker

17. Solow Growth Model
y = f(k)
function is not linear
diminishing
y = √k

18. Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
y = √k

19. Solow Growth Model
save some fraction of income
savings = investment
S = I
S = sy
y = √k
S = s√k

20. Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
y = √k
S = I = s√k
S = I = .3√k

21. Solow Growth Model
things wear out
depreciation
D = d x K
D = dK
linear

22. Solow Growth Model
d = deprecation rate
Life = 1÷d
d = .02
Life = 1÷.02
Life = 50

23. Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
y = √k
S = I = s√k
S = I = .3√k
D = dkD
D = .02k
k = 100
y =
S =
D =
C =
D - S =
10
3
2
7
1
100
10
3
2
7

24. Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
savings
>
depreciation
depreciation
>
savings
savings
=
depreciation
Steady State