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Solow Model
LPR Chapter 4
a to b: same as FPM
K-intensive
L-intensive
Basic Equations:
Divide Y=f (K,L) by L to express all variables
in per-worker terms
Y/L=F(K/L,1)
y=f(k)
We have diminishing returns to capital as in
(4.3)
Since K =sY-dK:
k=sy-(n+d)k
k is determined by:
s, -nk, and dk,
where nk is the reduction in capital per worker
due to an increase in population.
Thus: S (and I) adds to K-per-worker, while L
growth and depreciation reduces K-per-worker
When sy>(n+d)k then k is increasing
7
sy>(n+d)k
production function
saving function
sy<(n+d)k
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