Transcription of Chapter 1 Neoclassical growth theory
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Chapter 1 Neoclassical growth theory
Chapter 1 Neoclassical growth The solow growth modelThe general questions of growth : What are the determinants of long-run economic growth ? How can we explain the vast differences in both output levels andgrowth rates across countries/time? solow s specific question: What do simple Neoclassical assumptions implyabout growth ? His key assumptions include: Constant returns to scale. Perfect competition. Complete information. No The basic modelTime and demographyTime is discrete. Our notation is going to use subscripts;Xtis the value ofvariableXat 1. Neoclassical growth THEORYAn aside: in Romer, most of the models are in continuous time, while I willgenerally use discrete time. Notation differs between continuous time anddiscrete time models, butalmostany macro model can be written in either- the difference is usually a matter of taste and convenience.
1.1. THE SOLOW GROWTH MODEL 3 so we can rewrite equation (1.3) as: K t+1 = (1−δ)K t +sY t (1.4) Firm The firm can take capital and labor and convert it into output (consump-tion and new capital) which is then sold back to the consumer. The firm’s technology is described by the production function Y t = F(K t,A tL t). A
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