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Spring 2008
Growth Rates in the Solow Growth Model
Model
Assume the following model for the economy:
Y = F (K, AL)
L̇ Ȧ
= n =g
L A
The growth rate in the labor force n and growth rate in technology g are taken as given. In
per-effective unit of labor terms, the production function is:
ye = f(e
k)
Capital evolves according to:
·
e
k = sf(e
k) − (n + g + δ)e
k
where k̇ is the derivative of capital with respect to time.1
At steady state, k̇ = 0 :
sf(e
k) = (n + g + δ)ek
Growth Rates
K̇
Growth rate of capital K
1
³ ´
K̇ L̇
Growth rate of capital per worker K
− L
K̇ L̇ Ȧ
= +
K L A
K̇ L̇ Ȧ
− = =g
K L A
Therefore, capital per-worker grows at a rate equal to the rate of technical progress.
You can find the remaining growth rates by take the time derivatives for output, consumption,
wages, and the real rental rate. You can use the steady state condition (since capital per effective-
· ·
labor unit is not growing, it must be that ye = 0 ande
c = 0.
³ ´
Ẏ L̇
Growth rate of output per worker Y
− L
L̇
We know L = n, this is given. We also know that ẏ = 0 when the economy is at steady state. We
can take the time derivative of the per-effective worker output and use this information to solve for
Ẏ Y
Y . Take the time derivative of y = AL
Take the time derivative:
·
µ ¶
1 −Y −Y
ye = Ẏ + Ȧ + L̇
AL A2 L AL2
1 −Y Ȧ −Y L̇
= Ẏ + +
AL AL A AL L
Use the steady state condition that implies ẏ = 0 :
1 Y Ȧ Y L̇
Ẏ = +
AL AL A AL L
Ẏ Ȧ L̇
= +
Y A L
Ẏ L̇ Ȧ
− = =g
Y L A
Therefore, output per-worker grows at a rate equal to the rate of technical progress
2
Growth rate of factor payments
Real wage
Wages are defined as the marginal product of labor. The marginal product of labor is w ≡ ∂Y ∂L . Note,
the steady state is defined in per effective units of labor, so the production function is y = f(k):
µ ¶
Y K
= f
AL AL
Y = ALf (e k)
Taking the derivative with respect to labor:
∂Y ³ ´ K
= Af (e
k) − ALf 0 e k
∂L AL2
³ ´ K
= Af (e
k) − Af 0 e k
AL
e 0 e
= Af (k) − Af (k)k
h i
e − f 0 (k)k
= A f (k) e