CHAPTER I.

THE SOLOW GROWTH MODEL

The production function of Cobb-Douglas: Y = F(K, AL) = K(AL)1-, Y K L A AL = = = = = 0<<1 Output Capital Labor Knowledge or effectiveness of labor Effective labor
.

The capital stock per unit of effective labor ( k ):

k = sf(k) - (n + g + )k
s = sf(k) = f(k) = (n+g+ )k The fraction of output devoted to investment Actual investment per unit of effective labor Output per unit of effective labor = Break even investment / required investment

Under the Constant Returns to Scale (CRS) assumption: Y = F(K, AL) F(K, AL) = F(K, AL) Defined that = ( K/AL = labor F(K,AL) labor >0 >0

1 , the production function can be written: AL

1 )F(K, AL) = F(K/AL, AL/AL) = F(K/L,1) = F(k, 1) = f(k) AL k = The amount of capital per unit of effective = Y/AL = y = f(k) = Output per unit of effective

Under the Cobb-Douglas production, the intensive form of the production function can be written: 1 1 K ( )F(K, AL) = ( )K(AL)1- = K(AL)- = ( ) = k AL AL AL Defined k = K/AL and f(k) = Y/AL, by using the Chain rule, the capital accumulation function can be written:
k = sk - (n + g + )k

On the level k* (the balanced growth path), k = zero (0), so actual investment is equal to break event investment: sk* = (n + g + )k* k*
1 s = n + g +

Defined that production function y = k, so it can be written:

1 s y* = n + g +

Consumption per unit of effective labor, c = (1 s) k, so it can be written:

s c* = (1 - s) n + g +
1

c* is level of consumption per unit effective labor in the steady state: c* = f(k*) - sf(k*) In the steady-state, sf(k*) = (n + g + )k*. c* = f(k*) - (n + g + )k* Maximize consumption per unit of effective labor with respect to the savings rate:

c * s *

=0

[f(k*) - (n + g + ) The condition must hold, kGR: f(kGR) = n + g + 1 k = n + g + G R n + g + k 1 = G R kGR

k * s *

=0

1 = n + g +

The relationship between k* and s are:

s k* = n + g +
1 1

Substituted as:
s n + g +
1 1

n + g +

1 1

s s = n + g + n + g +

s =

CHAPTER II. INFINITE-HORIZON AND OVERLAPPING-GENERATIONS MODELS

The households utility function:

L (t ) dt H t =0 C(t) = The consumption of each member of the household at time t u(.) = The instantaneous utility function, which gives each members utility at a given date L(t) = The total population of the economy L(t)/H = The number of members of the household u(C(t))L(t)/H = The households total instantaneous utility at t = The discount rate; the greater is , the less the household values future consumption relative to current consumption
U=

u (C (t ))

The instantaneous utility function:

C (t )1 > 0, n (1 )g > 0 , 1 = The coefficient relative-risk-aversion (or CRRA) (which is defined as-Cu(C)/u(C)) for this utility function
u(C(t)) = The real interest rate at time t: r(t) = f(k(t)) The real wage at t: W(t) = A(t)[f(k(t)) k(t)f(k(t))] The wage per unit of effective labor: W(t) = f(k(t)) k(t)f(k(t)) The Dynamics of c:

c (t ) = f ' (k (t )) g c (t )

c = 0 when f(k) = + g, k = k*
k > k*, f(k) < + g, and so c is negative, k < k*, c is positive The log utility Cobb-Douglas case:
. .

kt+1 =

1 (1-)k t (1 + n)(1 + g )( 2 + )

(a) A rise in n. When n increases, kt+1 decreases for every kt, except for kt = 0, as it can be seen in figure.

(b) A downward shift of the production function (that is, f(k) takes the form Bk, and B falls). The production function becomes as follow: kt+1 =
1 (1-)Bk t (1 + n)(1 + g )( 2 + )

When B falls, the kt+1 function goes down for every kt in the same manner as an increase in the population growth, as it can be seen in figure above. (c) A rise in . The function f(x) are:

ln f ( x) ( x) f = x x ( x) f ln f ( x) = f(x) x x

It can be applied as the

( k t )

( k t ) ( ln k t ) = k = k ln k t t
Taking a derivative of kt+1 with respect to , it denotes with 0 < < 1.
1 (1 + n)(1 + g )( 2 + )

t+ k 1 = [-k + (1 ) k lnk t ] = [k ((1-)ln k t -1)] t t t

1 1 , kt+1 increases, for ln kt < , kt+1 decreases. It 1 1 means that the curve becomes "less curved", as it can be seen in figure:

Hence, ln kt >

The increase in the capital share 4 In the BGP level of capital: k* = [(1 )] 1 , Hence:
1

k *

1 [(1 )] 1 (-)<0 1

k* goes down when is increasing.

CHAPTER III. NEW GROWTH THEORY