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Advanced Macro (Subject) / VL5 (Lesson)
- The Golden Rule Steady State Higher levels of s lead to s higher Steady State capital stock this leads to more output and potentially to higher consumptio However, depreciation is increasing in K and FKK<0 Thus, high investment levels are required to sustain high capital stock C is maximized when FK(K*,L)=δ
- Population growth in the solow Model Population growths at rate n thus, k=K/L would fall with n>0 to prevent this, additional ΔL*K capital units per head are needed Thus, additional ΔL/K*K/L=nk must be generated The change in the capital stock can be written as Δk = sf(k) - (δ + n)k
- Technological progress in the Solow-Model Output per capita is growing because production technologies are constantly improved new variable E = Labor efficiency Assumption: Exogenous technological progress increases output, just as more labor increases output. Thus, technological progress is labor-augmenting. We assume: g = ΔE/E
- Technological progress in the Solow-Model Output per capita is growing because production technologies are constantly improved new variable E = Labor efficiency Assumption: Exogenous technological progress increases output, just as more labor increases output. Thus, technological progress is labor-augmenting. We assume: g = ΔE/E in order to keep k constant, investments have to equal (δ+n+g)*k
- Assessment of the Investment rate In order to assess whether the investment rate need to be modified we can use the golden rule (MPK-δ) > (n+g), then the investment rate should be increased, otherwise decreased
- Allocating investments The Solow model assumes just one kind of capital There are several kinds: physical capital, public infrastructure, human capital
- How to allocate investments over several kinds? Market-based allocation: all kinds are treated equally. Supply and demand drive capital towards the highest marginal product Industry policy: the government prefers investing into specific industries as it believes to generate positive external effects
- Problems with industry policy The government is not able to identify exactly those industries that would generate the highest positive external effect The government might allocate invetment based on political rationality, rather then on economic rationality
- How can we induce technological progress? Patent rights: cause innovation by securing temporary monopoly power to innovators Subsidies for R&D Subsidizing research at universties
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