Transition Dynamics:
And the Solow model:
Transition dynamics (in the Solow model) refers to:
Movement of an economy from one → steady state to another over time .
The Solow Model is :
Neoclassical growth model
Explains long term growth of an econ through
Accumulation of capital (physical, human) + technological progress
Capital accumulation plays a role in economic growth.
e.g. machines and other types of capital (human) increases our output in the same time.
But because of; it is hard to keep
capital stock
Law of diminishing returns to capital growing in net
Capital that depreciates at a constant rate term
≈ > capital stock
= harder to
produce >
(diminishing returns)
Because of what was just mentioned capital ≠ be reason for long run growth
Cobb-dougles + capital accumulation equation explaines this as well a transition dynamic
The principles of transition dynamics:
Eco = away from steady state(SS) Capital -Labour forces returns economy 2 SS
Eco = far for SS (e.g. capital poor countries) moves quicker
But when it is getting closer growth slows down
Face 2 problems
Depresiation and
diminishing
returns
This is because of two things:
Diminishing returns to capital > capital rich econ = harder to add extra unit of K productively
With constant depreciation rate econ = richer (capital stock must be bigger)
when you have more K – you have more K wearing out at a constant rate
Must replace lost capital each year which eats up social efforts and resources.
When there is a change in the
savings rate
population growth
technology progress
Econ may experience a new steady with a different per capita output
Principle of TD + Solow model are useful in explaining certain economic growth outcomes
because they show how changes in key variables can affect long term grow trajectory of an economy.
e.g. > in saving rate = > SS level per capita output
> population growth = < SS level per capita output
We analyse this to better understand factors that drive
economic growth
to develop policies to sustain growth
Draw graph of Solow diagram
Golden State:
GOLDEN STATE : DEF: Level of saving that maximizes consumption per capita in the SS of the
Solow model. ≈ maximum consumption per capita in SS
Represents optimal level of S to balance benefits of current consumption with benefits of investing
in physical capital for future consumption.
In Solow model:
in S rate = higher investment + capital accumulation = > output per capita = >
consumption per capita in SS
AWK : GS = level of savings that generates highest consumption per capita
If savings rate GR = SS consumption is lower than it could be
If saving rate GR = SS consumption is lower due to high marginal cost of forgone
consumption.
The system of evaluating the Solow model is as follows
At the SS the level of K = constant
Variables as - Output + consumption also = constant
SS happens because net investment =0
+
TFP and Savings = exogenous
The golden steady state = best steady state achievable in the Solow Framework
Need to have : specific level of capital per worker
* Rate of savings
- producing highest level of consumption possible in the SS for given production function
Rate of depreciation
To get to golden steady state:
Capital (k*gold) policymakers must manipulate rate of savings (s) as the econ will not have
tendency to move towards (k*gold)
k*gold) def = steady value level of capital per worker that maximises consumption ,
express c* as k* in the following
c* = y* - i*
= f(k*) -i*
=f(k*) - ∞k* - in the steady state i* = ∞k* because k = 0 at that point
From there we graph f(k*) and ∞k* and look for the point where the gap between them is biggest
The gap = consumption and expressed as c* = f(k*) -∞k* will be bigger where the slope of the
production function f(k*) = slop of depreciation line ∞k*
Slope of production function determined by MPK
Slope of depreciation line determined by constant rate of depreciation
In algebraic terms , problem is to find value of k* that maximises c* = f(k*) -∞k*
Take fist order derivative of the expression and setting it = to 0
This yields f’(k*)-∞ = 0 where f’(k*) = MPK = Slope of production function and ∞ = slope of
steady state investment and depreciation lines
Dfdf
Non- Rivalry:
Def: Characteristic of G + R , can be consumed by multiple individuals/entities (@same time) without
X diminishing availability/quality.
e.g (knowledge) In Romer model knowledge = non-rival good because it can be
Knowledge generates increase return to scale in production where - marginal product of
knowledge > as > of it is used in production.
NR > returns in production because it allows accumulation of knowledge over time.
> individs/firms contribute to pool of knowledge > level of effective labour(A) >
= > levels of output + econ growth
NR X guaranty non-excludability but still ways to protect ( intellectual property , patents)
Confidentiality can also help protect. ≈ benefit of knowledge X available to all ≈ market power +
reduced comp
e.g (Ideas) is in contrast with physical objects that are obviously rivalrous.
- Use of an idea X reduce of ideas availability to another ≈ non-rivalry.
Also increase returns to scale/ ideas in Romer model – growth can be achieved
In Solow model, the diminishing returns to capital per worker yields the SS condition in which no
growth occurs.
Solution of Romer model yields balanced growth path (by idea growth rate). A such…..
*See it in photo on ipad.
