Macroeconomics 8

Solow model vs. Endogenous growth theory

Externalities concerned with accumulation of capital
In the Solow model, firms are able to capture all of the returns to investment.
However, it seems reasonable that there might be externalities in capital formation so that the social return might be higher than the private rate of return.
These externalities could arise because workers move between firms taking their knowledge of the production process with them (learning by doing).
In an extreme case this might lead to there being constant returns to capital.

AK model as the simplest endogenous growth model (Part 1)

AK model as the simplest endogenous growth model (Part 2)

AK model graphically
Y=AK
sY=sAK
δK

AK model implications
The growth rate of an AK economy is an increasing function of the saving rate, so a government policy to raise the saving rate will raise the growth rate.
The growth rate of an AK economy does not depend upon its initial capital stock, so there is no convergence between economies with different initial capital stocks even if they have the same saving rates, levels of technology and depreciation rates.
Technical progress and population growth are not necessary to generate per capita growth.

Differences between predictions of Solow model and AK model
The Solow model has two main predictions:
For countries with the same steady-state, poor countries should grow faster than rich ones.
An increase in investment raises the growth rate temporarily as the economy moves to a new steady-state. But once the new higher steady-state level of income is reached, the growth rate returns to its previous level.
However, the AK model yields the opposite predictions – there is no convergence, and policy changes can have permanent effects.

R&D model as another version of endogenous growth theory (Part 1)

R&D model as another version of endogenous growth theory (Part 2)

R&D model as another version of endogenous growth theory (Part 3)

R&D sector and externalities

Basic ideas of Lucas (1988) model of growth and human capital accumulation

The basic relationships of Lucas (1988) model
The production depends on the human capital stock and the share of working time spent on production
The human capital stock depends on the share of working time spent on the higher education.

Galor – Zeira model as a growth model including both human capital accumulation and role of income distribution

Utility function

Marginal productivity of skilled labor

Asymmetric information on credit market

Decisions to invest or not to invest in human capital and consequences

The condition for a refusal to invest in human capital

The condition for investing in human capital

Distribution of inheritances and its role

The conditions for accumulation of human capital

The essential diagram

The description of choices