Chapter 2: Growth Theory Preliminars
Advanced Macroeconomics
An Easy Guide
Campante, Sturzenegger & Velasco
Advanced Macroeconomics LSE PRESS 1/23
Chapter 2: Growth Theory Preliminars
Why do we care about growth?
The evolution of the world GDP per capita over the years
1-2008
Advanced Macroeconomics LSE PRESS 2/23
Chapter 2: Growth Theory Preliminars
Why do we care about growth?
Log GDP per capita of selected countries (1820-2018)
Advanced Macroeconomics LSE PRESS 3/23
Chapter 2: Growth Theory Preliminars
Why do we care about growth?
Log GDP per capita of selected countries (1960-2018)
Advanced Macroeconomics LSE PRESS 4/23
Chapter 2: Growth Theory Preliminars
The Kaldor Facts
1 Output per worker shows continuous growth,with no tendency
to fall.
2 The capital/output ratio is nearly constant.(But what is
capital?)
3 Capital per worker shows continuous growth (... follows from
the other two).
4 The rate of return on capital is nearly constant (real interest
rates are flat).
5 Labour and capital receive constant shares of total income.
6 The growth rate of output per worker differs substantially
across countries(and over time, we can add, miracles and
disasters)
Advanced Macroeconomics LSE PRESS 5/23
Chapter 2: Growth Theory Preliminars
The Solow Model
The Solow Model
Y = F (K , L, t) , (1)
K̇ = I − δK = s · F (K , L, t) − δK , (2)
Lt = e nt . (3)
Y = F (K , L). (4)
Advanced Macroeconomics LSE PRESS 6/23
Chapter 2: Growth Theory Preliminars
The Solow Model
The (neoclassical) production function
Where K > 0 and L > 0, F (·) exhibits positive and diminishing
marginal products with respect to each input:
∂F ∂2F
> 0, <0
∂K ∂K 2
∂F ∂2F
> 0, < 0.
∂L ∂L2
Advanced Macroeconomics LSE PRESS 7/23
Chapter 2: Growth Theory Preliminars
The Solow Model
F (·) exhibits constant returns to scale:
F (λK , λL) = λ · F (K , L) for all λ > 0.
and K and L satisfy the Inada conditions:
∂F ∂F
lim = lim = ∞,
K →0 ∂K L→0 ∂L
∂F ∂F
lim = lim = 0.
K →∞ ∂K L→∞ ∂L
Advanced Macroeconomics LSE PRESS 8/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Y = F (K , L) (5)
y = f (k) (6)
Y = AK α L1−α (7)
y = Ak α (8)
Advanced Macroeconomics LSE PRESS 9/23
Chapter 2: Growth Theory Preliminars
The Solow Model
The law of motion of capital
K̇ /L = s · f (k) − δk. (9)
d (K /L)
k̇ ≡ = K̇ /L − nk, (10)
dt
k̇ = s · f (k) − (n + δ) · k. (11)
Advanced Macroeconomics LSE PRESS 10/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Dynamics in the Solow model
Advanced Macroeconomics LSE PRESS 11/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Finding a balance growth path
s · f (k ∗ ) = (n + δ) · k ∗ . (12)
1
∗ sA 1−α
k = . (13)
n+δ
α
∗ 1 s 1−α
y =A 1−α · . (14)
n+δ
Advanced Macroeconomics LSE PRESS 12/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Transition Dynamics
k̇ s · f (k)
γk ≡ = − (n + δ) . (15)
k k
ẏ k̇
= α = αγk . (16)
y k
Advanced Macroeconomics LSE PRESS 13/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Dynamics in the Solow Model again
Advanced Macroeconomics LSE PRESS 14/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Transition dynamics
d k̇
= s · f ′ (k) − (n + δ). (17)
dk
d k̇
= s · f ′ (k ∗ ) − (n + δ). (18)
dk
k=k ∗
−1
d k̇ sA
= s · Aα − (n + δ) = (n + δ) (α − 1) (19)
dk n+δ
k=k ∗
Advanced Macroeconomics LSE PRESS 15/23
Chapter 2: Growth Theory Preliminars
The Solow Model
The effect of an increase in the saving rate
Advanced Macroeconomics LSE PRESS 16/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Dynamic Inefficiency
c ∗ (s) = f [k ∗ (s)] − (n + δ) · k ∗ . (20)
f ′ (kg ) = (n + δ) . (21)
Advanced Macroeconomics LSE PRESS 17/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Feasible consumption
Advanced Macroeconomics LSE PRESS 18/23
Chapter 2: Growth Theory Preliminars
The Solow Model
Absolute and conditional convergence
s ′ f (k)
∂γk /∂k = f (k) − < 0. (22)
k k
Advanced Macroeconomics LSE PRESS 19/23
Chapter 2: Growth Theory Preliminars
Can the model account for income differentials?
α
∗ 1 s 1−α
y =A 1−α (23)
n+δ
s α
y∗ =
1−α
(24)
δ
α α
s1 1−α
y1 δ s1 1−α
= α = (25)
y2 s2 1−α s2
δ
α
∗ 1 s 1−α
y =A 1−α (26)
n+δ
Advanced Macroeconomics LSE PRESS 20/23
Chapter 2: Growth Theory Preliminars
The Solow model with exogenous technological change
ẏ Ȧ k̇
= + α = a + αγk . (27)
y A k
On the BGP
ẏ
= a. (28)
y
Et = Lt · e λt = L0 · e (λ+n)t , (29)
Y = F (Kt , Et ) . (30)
K
k= . (31)
E
Advanced Macroeconomics LSE PRESS 21/23
Chapter 2: Growth Theory Preliminars
The Solow model with exogenous technological change
So
k̇ K̇ Ė sy
= − = − δ − n − λ, (32)
k K E k
k̇ sf (k)
= − δ − n − λ, (33)
k k
k̇ = sf (k) − (δ + n + λ) k. (34)
Advanced Macroeconomics LSE PRESS 22/23
Chapter 2: Growth Theory Preliminars
The Solow model with exogenous technological change
For k̇ = 0
sf (k)
= (δ + n + λ) . (35)
k
K̇ Ė Ẏ
= =n+λ= . (36)
K E Y
But then .
Y
L Ẏ L̇
Y
= − =λ (37)
L
Y L
Advanced Macroeconomics LSE PRESS 23/23