Growth & Development Midterm II

Dr. Santos | Trinity U

Y

GDP

n

population/labour supply

K

capital stock

A

productivity level

F

production function

Q

quantity

P

price

(Harrod Domar Growth Rate) v =

K/Y

Solow Steady State (savings = investment)

s times f(K) = n times K

Based on Solow's assumed production function, why can't a country grow forever solely by accumulating more capital?

Due to diminishing marginal returns.

Harrod-Domar Model Importance

Harrod-Domar was an important model because it led Solow to react; Solow's work was done with Harrod-Domar's work in mind. Solow wanted to find a stable steady state while none exists in Harrod-Domar (which is unstable).

Harrod-Domar Model Attention

The model gained attention because it was simple and had strong policy implications.

Harrod-Domar Growth Rate

Ŷ = k̂ = s/v

Consumption Formula

c = (1-s) * y

s

savings (level)

𝓼

savings rate

I

investment (level)

w

real wages

r (cursive)

real interest rate

C

consumption

n = ň

population growth rate

α

share of capital

Solow Model Equations

y = f(K)

S/L = 𝓼f(K)

I/L = nK

c = y - I/L OR c = (1-s)y