y = Ak

y = Ak1 k

= Ak kk

= y kk
y = k
y
k

= sAk1 (n + )


= sAy 1 n
sAe 1 y n
y
n
y
sy 1

s f kk
n
(

ln

Now differentiate w.r.t ln

and we obtain, once again using the steady state

condition that

sf (k )
k

ln

(1

(1

)(

So we obtain the result that output and capital per capita converge to their

steady state values at the same rate,

Part 4.6

For = 0.3, n = 0.005, = 0.05, what is the speed of convergence to

the steady state ? Compare this to the empirical results in BSM, chapters 11
and 12.

Part 4.7 Which capital share would we need for a of

Rearrange equation (4) to solve for

=
Just plug in the numbers for

is .

0 02?

and we obtain

n+

+1

n, , and the desired and we get that the implied

Question 5 So far we have assumed that all production factors are renewable.

In this problem we add a limited resource

production function be

to our production process. Let the

K (AL) R1 ,

R is the amount of land available to the firm. Assume > 0, > 0, and
+ < 1. The factors of production evolve according to

where

sY
7

A
L
R

gA
nL

Part 5.1 Does this economy have a unique and stable balanced growth path?

That is, does the economy converge to a situation in which each of Y , K , L, A,

and R are growing at constant (but not necessarily equal) rates? If so, what are
those growth rates? If not, why not?
This is an important question. We have that capital, population and technology
are growing, but land is staying constant.

In order to determine existence of

a steady state we need to establish that all variables grow at constant (but
possibly different) rates.
at constant rate

g,

We know that

and

does not grow.

check are capital and output.

grows at constant rate

n, A

grows

So the only two variables left to

To compute the growth rate of output start by

differentiating the log of the production function w.r.t. time:

Y
ln Y
ln Y
t
Y

=
=

K (AL) R1
ln K + (ln A + ln L) + (1 ) ln R


K
A L
+
+
K
A L
K + (g + n)

(6)

Note from equation (6) that the growth rate of output will be constant whenever
the growth rate of capital is constant. So lets look at the growth rate of capital,

next:

K
K
K

=
=

sY K
sY

Now differentiate the growth rate of capital with respect to time.

(7)

Remember,

it has to be constant, so the time derivative of the growth rate has to be zero!

K
K
t

Plug in for

sY
K

sY

K K

from (6):

0 =

But from (7) we know

sY
K

0 = (

sY
sY
(K + (g + n))

K
K K
=

K + .

Therefore we get:

K + ) (( 1)K + (g + n))
8

which has two solutions for

K .

that

One possibility is that

(g + n )
.
1
diagram in (K , K )
K

It is simple to draw a phase

K >

, the other one

(8)

space to see that for any

the growth rate will converge to the one given in (8).

Now that we

have obtained the stable steady state growth rate of capital, plug into (6) and
see that output is growing at the same rate.
So the answer to the question is that yes, there exists a unique stable equilibrium growth path!

Along this growth path capital and output grow at the

same rate given in equation (8).

Part 5.2 Does the fact that the stock of land is constant imply that permanent
growth is impossible? Explain the intuition of your result!
The growth rate of output and capital given in equation (8) is clearly positive.
In fact, lets consider if it is also possible to obtain a positive steady state growth
rate of

output per capita.

Output per capita is given by

Y /L, so the growth rate

of output per capita is the growth rate of output minus the population growth
rate:

Note that

(g + n )
n
1
(g + n) n(1 )
1
g n(1 )
1

is the importance of technology in the production process,

growth rate of technology. Furthermore, (1

the production process, and

is the

) is the importance of land in

n is the rate at which land per capita shrinks.

So we

get that as long as technological growth (weighted by its importance) is faster

than population growth (weighted by the importance of land) the economy will
exhibit a positive steady state growth rate of output per capita.