Neoclassical Growth Model: Solow-Growth

Study Notes

Factors of Production

The neoclassical growth model uses capital (K) and labor (L) as the factors of production.

Per Capita Consumption Equation

The per capita consumption (c) equation is: c = (1 - s) * y, where 's' is the savings rate and 'y' is output per capita.

Production and Workers

The production function in the neoclassical growth model exhibits diminishing marginal returns to capital, meaning that as the number of workers (L) increases, the per capita output (y) increases at a decreasing rate.

Demand for Goods Per Capita

The demand for goods per capita is represented by: c + i, where 'c' is per capita consumption and 'i' is per capita investment.

Consumption Function

The consumption function is expressed as: c = (1 - s) * y, where 's' is the savings rate and 'y' is output per capita.

Steady State Level of Capital

The steady state level of capital stock per capita is known as the "golden rule" level of capital.

Depreciation and Capital Intensity

Depreciation reduces the amount of capital available for production, leading to a decrease in capital intensity.

Savings Rate and Growth

A higher savings rate leads to faster economic growth outside the steady state by increasing investment and capital accumulation.

Capital Accumulation Equation

∆(k) = sf(k) – δ k – n k represents the change in capital stock per capita, where 's' is the savings rate, 'f(k)' is the production function, 'δ' is the depreciation rate, 'k' is capital stock per capita, and 'n' is the population growth rate.

Population Growth and Capital

The assumption of population growth with a rate of 'n' implies that for the per capita capital stock to remain constant, the total capital stock must grow at the same rate as the population.

Description

This quiz covers the neoclassical approach to growth, focusing on the Solow-growth model and key definitions such as factors of production, production per worker, capital intensity, per capita consumption, per capita investments, and savings ratio. It also delves into the interpretation of linear-homogeneous production function in the empirical macroeconomics context.