Slides Topic1
Slides Topic1
Slides Topic1
Nikos Kokonas1
University of Bath
Department of Economics
Semester 1
2020-21
1
I would like to thank Andreas Schaefer for sharing his slides with me.
Contents
Topic 1) The Solow Growth Model
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1. Introduction and Stylized Facts
Literature
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1. Introduction and Stylized Facts
The importance of economic growth
7000
6000
5000
GDP per Capita (int. $)
4000
3000
2000
1000
0
1720 1770 1820 1870 1913 1950 2000
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1. Introduction and Stylized Facts
Evolution of gdp per capita in different regions of the world
20.000
15.000
10.000
5.000
0
1820 1870 1913 1950 2000
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1. Introduction and Stylized Facts
Korean peninsula at night
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1. Introduction and Stylized Facts
Stylized facts of the growth process in the developed world (1)
3. Wirtschaftliches Wachstum
Regularity #1: output per capita and captial per capita (capital intensity) are increasing over time
35 90
USA 80
30
UK 70 USA
25
Japan 60 UK
Japan
1990 $
20 50
1990 $
15 40
30
10
20
5
10
0 0
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
output per unit of labor (approx. output per capita) capital per unit of labor (capital intensity)
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1. Introduction and Stylized Facts
Stylized facts of the growth process in the developed world (2)
3. Wirtschaftliches Wachstum
Regularity #2: the capital coefficient (K/Y) is more or less constant over time
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1. Introduction and Stylized Facts
Stylized facts of the growth process in the developed world (3)
3. Wirtschaftliches Wachstum
Regularity #3: the average real wage per hour is increasing over time
140
120
100
80
60
Canada
Japan
40
France
Italy
20
United Kingdom
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1. Introduction and Stylized Facts
Stylized facts of the growth process in the developed world (4)
3. Wirtschaftliches Wachstum
10
5
Real interest rate in %
‐5
Germany
France
‐10
United Kingdom
United States
Japan
‐15
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1. Introduction and Stylized Facts
Stylized facts of the growth process in the developed world (5)
3. Wirtschaftliches Wachstum
Regularity #5: the labor income share (wL/Y) and the capital income share (rK/Y) are trendless
100%
90%
capital income share Kapitaleinkommensquote
80%
70%
60%
Lohnquote
50%
labor income share
40%
30%
20%
10%
0%
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2. Production
Production function
• formally
Y = F (0, L) = F (K , 0) = 0 (2)
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2. Production
2) Positive but diminishing marginal returns
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2. Production
4) The Inada-conditions are fulfilled
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2. Production
Graphical presentation of a neoclassical production function (1)
Y =F(K,L)
condition 1)
0
K
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2. Production
Graphical presentation of a neoclassical production function (2)
Y =F(K,L)
Y1
K
0 ܭଵ K
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2. Production
Graphical presentation of a neoclassical production function (3)
Y =F(K,L)
} Y2
K
Y1
K
0 ܭଵ ܭଶ K
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2. Production
Graphical presentation of a neoclassical production function (4)
∂Y ∂Y
• for ∆ → 0. the change in output is obtained by ∂K 1
and ∂K2
→ marginal productivities are represented by the slope
Teil 2: Die reale Makroökonomik
→ of the production function
Y
߲ܻ
߲ܭଶ
߲ܻ Y =F(K,L)
߲ܭଵ
condition 2)
0 ܭଵ ܭଶ K
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2. Production
The intensive form of the production function (1)
1 Y
• constant returns to scale: λY = F (λK , λL) → set λ = L ⇒ L = F ( KL , 1)
Y
• y= L output per capita
K
• k= L capital intensity
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2. Production
The intensive form of the production function (2)
y
f’ ݇ଶ
y=f ݇
f’ ݇ଵ
condition 3)
0 ݇ଵ ݇ଶ k
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3. The Fundamental Dynamic Equation
Incomes, savings, investment and capital accumulation (1)
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3. The Fundamental Dynamic Equation
Incomes, savings, investment and capital accumulation (2)
S = sY , (6)
I = S = sY (7)
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3. The Fundamental Dynamic Equation
Incomes, savings, investment and capital accumulation (3)
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3. The Fundamental Dynamic Equation
Incomes, savings, investment and capital accumulation (4)
K̇ = sF (K , L) − δK (14)
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3. The Fundamental Dynamic Equation
K
Dynamics of k = L
k̇ = sf (k ) − (n + δ)k
Wirtschaftliches Wachstum
ܻ
ݕൌ
ܮ
݂ ݇
ܭ
݇ൌ
0 ܮ
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (1)
k̇ = sf (k ) − (n + δ)k
Wirtschaftliches Wachstum
0 1
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (1)
k̇ = sf (k ) − (n + δ)k
Wirtschaftliches Wachstum
0 1
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (1)
k̇ = sf (k ) − (n + δ)k
Wirtschaftliches Wachstum
ܻ
ݕൌ
ܮ
݂ ݇
݊ߜ ݇
݇ ݂ݏ
ܭ
݇ൌ
0 ܮ
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (2)
sf (k ) = (n + δ)k → k̇ = 0
Wirtschaftliches Wachstum
∗
0
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (2)
3. Wirtschaftliches Wachstum
∗
0
>0
∗
0
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (3)
3. Wirtschaftliches Wachstum
>0
∗
0
<0
>0
∗
0
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4. The Dynamics of the Solow Model
graphical analysis of k̇ (4)
3. Wirtschaftliches Wachstum
<0
>0
∗
0
Wirtschaftliches Wachstum
=0
<0
>0
∗
0
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4. The Dynamics of the Solow Model
Stability of the steady state k ∗
3. Wirtschaftliches Wachstum
=0
<0
>0
∗
0
• For k < k ∗ we have sf (k ) > (n + δ)k such that k̇ > 0, i.e. k ↑ and y ↑
• For k > k ∗ we have sf (k ) < (n + δ)k such that k̇ < 0, i.e. k ↓ and y ↓
→ k moves from the left and the right-hand side of k ∗ towards k ∗
→ k ∗ is a unique and stable steady state
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4. The Dynamics of the Solow Model
Steady state levels of per capita savings and per capita consumption
3. Wirtschaftliches Wachstum
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5. Increase in the Savings Rate
Positive correlation between investments and per capita income (y )
3. Wirtschaftliches Wachstum
25,000
Europe
Level of Real GDP per capita in 2000 (US$)
Africa
20,000 America
Asia
15,000
10,000
5,000
0
0 5 10 15 20 25 30 35 40
Average investment rate (% of GDP)
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5. Increase in the Savings Rate
Permanent increase in the savings rate
3. Wirtschaftliches Wachstum
∗
∗
∗ ∗
0
• A permanent increase of s from s1 to s2 increases y and k permanently
• The economy converges to a higher steady state with constant k ∗ and y ∗
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6. Increase in Population Growth
Negative correlation between population growth and GDP per capita (y )
3. Wirtschaftliches Wachstum
50,000
45,000
GDP per capita in 1996 US$, 2000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
Average Population Growth Rate,1960-2000 (% per annum)
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6. Increase in Population Growth
Permanent increase in the population’s growth rate
3. Wirtschaftliches Wachstum
∗ s
∗
∗ ∗
0
• A permanent increase of n from n1 to n2 reduces y and k permanently
• The economy converges to a lower steady state with constant k ∗ and y ∗
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7. Technological Progress
Is the Solow model a reasonable model? (1)
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7. Technological Progress
Technological progress in the Solow model (1)
y y=f ,
y=f ,
,
→ ,
0
k
• A permanent increase of A from A1 to A2 shifts f (k ) upwards
→ Conceptually, a continuous increase in A over time allows for continuous
→ increases in k and y
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7. Technological Progress
Technological progress in the Solow model (3)
• what is A · L?
• an increase of A by 10% has the same impact as an increase in
employment by 10%
→ we assume labor-augmenting technological progress
• A · L is known as effective labor or efficiency units of labor
with the same K one our of work today produces more
output (is more effective) than before because A ↑
• assume that A evolves exogenously according to
A(t) = A0 · ex·t , A0 , x > 0 (19)
such that the growth rate of A is obtained as
Ȧ
=x (20)
A
and the amount of efficiency units of labor (A · L) grows at rate
n+x
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7. Technological Progress
Technological progress in the Solow model (4)
Y = F (K , AL) (21)
K
= AL · F ( , 1) (22)
AL
and
Y
ŷ = = F (k̂ , 1) = f (k̂ ) (23)
AL
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7. Technological Progress
Technological progress in the Solow model (5)
K̇ = sF (K , AL) − δK , (24)
which we devide now by the effective units of labor AL, such that
K̇ F (K , AL) K
= s −δ = sF (k̂ , 1) − δ k̂ , (25)
AL AL AL
K̇
= sf (k̂ ) − δ k̂ . (26)
AL
• As K̇ ˙ ˙ K
∂ AL
AL = k̂ + (n + x)k̂ (follows from k̂ = ∂t ) we obtain
˙
k̂ = sf (k̂ ) − (n + x + δ)k̂ (27)
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7. Technological Progress
Graphical illustration of the Solow model with technological progress
tschaftliches Wachstum
0 ∗
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7. Technological Progress
Graphical illustration of the Solow model with technological progress
3. Wirtschaftliches Wachstum
0 ∗
• as ŷ = Y K
AL and k̂ = AL it follows that
ŷ˙ Ẏ Ȧ L̇ Ẏ
= −( + )= − (x + n) = 0 (28)
ŷ Y A L Y
˙
k̂ K̇ Ȧ L̇ K̇
= −( + )= − (x + n) = 0 (29)
k̂ K A L K
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7. Technological Progress
Implications of technological progress in the Solow model (2)
ẏ Ẏ
= − n = x, (30)
y Y
K
and for the growth rate of the capital intensity k = L
k̇ K̇
= −n =x (31)
k K
⇒ capital intensity and output per capita are now growing at a
constant rate x in the long-run (steady state)
• Accordingly, the growth rate of aggregate output and
aggregate capital equal the sum of population growth and
technological progress
Ẏ K̇
= = x + n. (32)
Y K
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7. Technological Progress
The emergence of steady state growth in the Solow model (summary)
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8. Growth Accounting
Growth accounting and the Solow residual (3)
3. Wirtschaftliches Wachstum
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8. Growth Accounting
Growth accounting and the Solow residual (4)
3. Wirtschaftliches Wachstum
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9. The Convergence Hypothesis
Absolute convergence and the neoclassical convergence mechanism
Jones (2002)
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9. The Convergence Hypothesis
Growth
3. rate
Wirtschaftliches Wachstum Growth rate
1885‐1994 1960‐1997
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9. The Convergence Hypothesis
3. Wirtschaftliches Wachstum
Average growth rate GDP
per capita 1960‐1992 in %
OECD
Africa
Asia
⇒ Dies ist das Streudiagramm für die globale Stichprobe von Ländern.
GDP per capita in 1960 (prices 1992 dollars)
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9. The Convergence Hypothesis
Absolute convergence versus conditional convergence (1)
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9. The Convergence Hypothesis
Absolute convergence versus conditional convergence (2)
3. Wirtschaftliches Wachstum
Average growth rate GDP
per capita 1960‐1992 in %
OECD
Africa
Asia
⇒ Dies ist das Streudiagramm für die globale Stichprobe von Ländern.
GDP per capita in 1960 (prices 1992 dollars)
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9. The Convergence Hypothesis
Absolute convergence versus conditional convergence (3)
• empirical test:
xj,1 ..xj,m : variables that control for the position of the steady state (s, n, x, government expenditures, etc.)
gyi : average growth rate over the observation period
yi,0 : income per capital at the beginning of the observation period
α0 : vector of exogenous components
ui : error term
i: country
→ convergence clubs
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9. The Convergence Hypothesis
Convergence clubs (1)
Acemoglu (2009)
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9. The Convergence Hypothesis
Convergence clubs (2)
.00020
.00016
.00012
Density
.00008
.00004
.00000
5,000 10,000 15,000 20,000 25,000 30,000 35,000
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