|
|
| Page 1 of 1 |
TheSaint
Dalai Lama
Posts: 6586
Location: Cook Islands
|
|
| Back to top |
|
 |
|
|
|
| Back to top |
|
|
spankie
VIP Member
Posts: 2958
Location: Belgium
|
 Posted: Sun, 24th Jun 2012 15:22 Post subject: |
|
|
What exactly don't you understand about the Solow growth model? The basic idea, the math, the implications?
It just says that societies save money which is used to invest in growth
On the other hand, societies need money to sustain the economic level (i.e. write down costs, replacement investments. An equilibrium is obtained when both are equal. i.e. societies reach a plateau phase
Only when there is a big technological shift, the whole system shifts upward and higher plateaus are reached.
The idea behind the model was that everybody can reach the same plateau. i.e. Western countries develop slower and slower, poorer countries develop fast and reach the same plateau eventually. Too bad it proved to be wrong... (but it's neoclassical after all, that's a whole bunch of nice economical theories which all proved to be wrong  )
It's nicely explained on the wiki page http://en.wikipedia.org/wiki/Neoclassical_growth_model
BAsically, It's a pure neoclassical model. The return is the savings which are invested, the cost are the cost related to population growth and replacement costs. Equilibrium is obtained when both are similar. Technology can shift towards a new equilibrium. Write that down and you will earn the credits 
|
|
| Back to top |
|
|
spankie
VIP Member
Posts: 2958
Location: Belgium
|
| Posted: Sun, 24th Jun 2012 15:30 Post subject: |
|
|
All right, it's sunday, i have nothing to do, more details!
The red line is the Cobb Douglas (neoclassical) production function. So, you have growth which slows down, classical diminishing returns. The production is total output of a society, denoted as Y. Savings are a fixed portion of production, once again a neoclassical concept. When a country produces Y, people working in it save sY (s is the saving quotient). The total production Y is the same as the sum of all wages paid, profits paid to shareholders etc. So I earn 10k per year, i save 10% * 10k -> s = 10%.
The green line shows the savings line, sY, which is the aforementioned quotient of the production function. So basically, the green line is the 'yield' of the economy.
the straight line is a cost function. The bigger the economy, the bigger the cost, but linear.
When the economy is in a point left of A, there is more saved money than replacement investment costs, so economy can grow. In point A, there is equilibrium.
What can shift the equilibrium? change in Technology -> producito function shifts upwards. Or change in saving quote, (s is bigger), so we end up in point B.
|
|
| Back to top |
|
|
Lutzifer
Modzilla
Posts: 12740
Location: ____________________ **** vegan zombie **** GRRAAIIINNSS _______
|
| Posted: Sun, 24th Jun 2012 15:51 Post subject: |
|
|
and here i was thinking that you were going to talk about penisses / ED
|
|
| Back to top |
|
|
TheSaint
Dalai Lama
Posts: 6586
Location: Cook Islands
|
| Posted: Sun, 24th Jun 2012 17:32 Post subject: |
|
|
So bsically technology enters through labor and increases production and this leads to economic growth?
|
|
| Back to top |
|
|
spankie
VIP Member
Posts: 2958
Location: Belgium
|
| Posted: Sun, 24th Jun 2012 18:12 Post subject: |
|
|
no!!! that's the whole idea of the model. Technology is an external event which comes as 'manna from the sky', independently from everything else.
So, production increases because labor and capital (population and investments). But eventually there is saturation, hence the plateau in the graph.
But there are external 'shocks' which introduce new technologies. Those new technologies make the current stock of capital and labor more effective, hence the production curve shifts upwards. Same input = higher output.
Economic growth is obtained independently of technological changes. Growth comes from the savings of people which are invested back into the economy. As long as the black curve (the 'cost curve') is below the green one, there is growth. Eventually the level of technology determines the plateau level.
So, the differences in economic level observed between countries are only determined by the technological level of the society.
I know the model uses a lot of 'random stylized facts' which are not necessarily true, but hey, it's economics. For example, why is the cost curve linear and the ouput Cobb-Douglas shaped. Why is growth determined by the difference between the two. Why is technology external? Well, because the model says so...
|
|
| Back to top |
|
|
| Page 1 of 1 |
All times are GMT + 1 Hour |
|
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum
|
Powered by phpBB 2.0.8 © 2001, 2002 phpBB Group
|
|
 |
|
