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Economic
Development
Lecture 8
Growth
Questions?
Harrod-Domar Growth Model
Robert
Solow
Nobel
Prize
1987
Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
y = √k
S = I = s√k
D = dkk
y =f(k)
S = I
S = s√k
D = dk
Add population
growth
n
nL
-nk
∆k = sy -(n+d)k
Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
y = f(k)
sy
(n +d)k
Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
savings
>
depreciation
depreciation
>
savings
savings
=
depreciation
Steady State
Solow Growth Model
steady state
S = D
s√k = dk
.3√k = .02k
k = 225
Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker
Steady State
225
k = 225
y =
S =
D =
C =
D - S =
15
4.5
4.5
10.5
0
15
4.5
y = √k
S = I = s√k
S = I = .3√k
D = dkD
D = .02k
Solow Growth Model
Increase
depreciation does not change
change savings rate
change productivity
Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker Raise
Savings
Rate
30%
40%
Solow Growth Model
income is a function of k
add a productivity factor to k
a
y = √k
y = a√k
a = technology
Solow Growth Model
k
Capital Per Worker
y
Output
Per
Worker y = a1√k
y = a2√k
Model
5 Equations
5Variables
3 fixed parameters
ModelVariables
Y = Output
K = Capital
L = Labor
S = Savings
I = Investment
Model Fixed
Parameters
d = depreciation rate
s = savings rate
n = population growth rate
Wolfram Demo
How to change the
production function?
Make Capital or Labor more
productive
Technology
Smarter
How to change the
production function?
Adapt
Adopt
Imitate
Innovate
Adding Technology
L
T x L
Y = F(K,T x L)
K
T x K
Y = F(T x K, L)
Y = F(TK,TL)
Problems
Where does T come from?
Manna from heaven
Can poor catch up?
Capital Per Worker
Output
Per
Worker
Big
Gain
Little
Gain
Maybe?
New Growth Models
Exogenous vs. Endogenous
Increasing returns
Positive externalities
R&D
Exam 1
1820
Six Capitals of Innovation
GNI per Capita (PPP)
Growth vs. development
Life Expectancy and Education
HDI
MDG
Rule of 70s
Institutions
HD
Solow

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