Professional Documents
Culture Documents
CHAPTER
Economic Growth I:
Capital Accumulation and
Population Growth
N. GREGORY MANKIW
PowerPoint® Slides by Ron Cronovich
© 2007 Worth Publishers, all rights reserved
In this chapter, you will learn…
80 Nepal
70 Bangladesh
% of population
60 Kenya Botswana
50 China
40 Peru
Mexico
30 Thailand
20
Brazil Chile
10 Russian
S. Korea
Federation
0
$0 $5,000 $10,000 $15,000 $20,000
Income per capita in dollars
Why growth matters
Capital per
worker, k
CHAPTER 7 Economic Growth I slide 11
The national income identity
Y=C+I (remember, no G )
In “per worker” terms:
y=c+i
where c = C/L and i = I /L
c1
y1 sf(k)
i1
k1 Capital per
worker, k
CHAPTER 7 Economic Growth I slide 15
Depreciation
k
1
Capital per
worker, k
CHAPTER 7 Economic Growth I slide 16
Capital accumulation
k = s f(k) – k
k = s f(k) – k
The Solow model’s central equation
Determines behavior of capital over time…
…which, in turn, determines behavior of
all of the other endogenous variables
because they all depend on k. E.g.,
income per person: y = f(k)
consumption per person: c = (1–s) f(k)
k = s f(k) – k
If investment is just enough to cover depreciation
[sf(k) = k ],
then capital per worker will remain constant:
k = 0.
Investment
and k
depreciation
sf(k)
k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 20
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
investment
depreciation
k1 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 21
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
k1 k2 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 23
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
investment
depreciation
k2 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 24
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
sf(k)
k
k2 k3 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 26
Moving toward the steady state
k = sf(k) k
Investment
and k
depreciation
Summary: sf(k)
As long as k < k*,
investment will exceed
depreciation,
and k will continue to
grow toward k*.
k3 k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 27
Now you try:
Assume:
s = 0.3
= 0.1
initial value of k = 4.0
Year k y c i k k
1 4.000 2.000 1.400 0.600 0.400 0.200
2 4.200 2.049 1.435 0.615 0.420 0.195
3 4.395 2.096 1.467 0.629 0.440 0.189
4 4.584 2.141 1.499 0.642 0.458 0.184
…
10 5.602 2.367 1.657 0.710 0.560 0.150
…
25 7.351 2.706 1.894 0.812 0.732 0.080
…
100 8.962 2.994 2.096 0.898 0.896 0.002
…
CHAPTER9.000 3.000
7 Economic 2.100
Growth I 0.900 0.900 0.000slide 31
Exercise: Solve for the steady state
Continue to assume
s = 0.3, = 0.1, and y = k 1/2
s1 f(k)
k
k 1* k 2*
CHAPTER 7 Economic Growth I slide 34
Prediction:
1,000
100
0 5 10 15 20 25 30 35
Investment as percentage of output
(average 1960-2000)
CHAPTER 7 Economic Growth I slide 36
The Golden Rule: Introduction
Different values of s lead to different steady states.
How do we know which is the “best” steady state?
The “best” steady state has the highest possible
consumption per person: c* = (1–s) f(k*).
An increase in s
leads to higher k* and y*, which raises c*
reduces consumption’s share of income (1–s),
which lowers c*.
So, how do we find the s and k* that maximize c*?
k gold
*
the Golden Rule level of capital,
the steady state value of k
that maximizes consumption.
To find it, first express c* in terms of k*:
c* = y* i*
= f (k*) i*
In the steady state:
= f (k*) k* i* = k*
because k = 0.
them is biggest.
i gold
*
k gold
*
y gold
*
f (k gold
*
) k gold
*
steady-state
capital per
worker, k*
CHAPTER 7 Economic Growth I slide 39
The Golden Rule capital stock
MPK =
k gold
*
steady-state
capital per
worker, k*
CHAPTER 7 Economic Growth I slide 40
The transition to the
Golden Rule steady state
The economy does NOT have a tendency to
move toward the Golden Rule steady state.
Achieving the Golden Rule requires that
policymakers adjust s.
This adjustment leads to a new steady state with
higher consumption.
But what happens to consumption
during the transition to the Golden Rule?
If k * k gold
*
then increasing c* y
requires a fall in s.
In the transition to c
the Golden Rule,
consumption is i
higher at all points
in time.
t0 time
If k * k gold
*
then increasing c*
requires an y
increase in s. c
Future generations
enjoy higher
consumption,
but the current i
one experiences
an initial drop t0 time
in consumption.
k = s f(k) ( + n) k
actual
break-even
investment
investment
Investment,
k = s f(k) ( +n)k
break-even
investment
( + n ) k
sf(k)
k* Capital per
worker, k
CHAPTER 7 Economic Growth I slide 47
The impact of population growth
Investment,
break-even ( +n2) k
investment
( +n1) k
An increase in n
causes an sf(k)
increase in break-
even investment,
leading to a lower
steady-state level
of k.
1,000
100
0 1 2 3 4 5
Population Growth
(percent per year; average 1960-2000)
CHAPTER 7 Economic Growth I slide 50
The Golden Rule with population
growth
To find the Golden Rule capital stock,
express c* in terms of k*:
c* = y* i*
= f (k* ) ( + n) k*
In the Golden
c* is maximized when Rule steady state,
MPK = + n the marginal product
of capital net of
or equivalently, depreciation equals
MPK = n the population
growth rate.
CHAPTER 7 Economic Growth I slide 51
Alternative perspectives on
population growth
The Malthusian Model (1798)
Predicts population growth will outstrip the Earth’s
ability to produce food, leading to the
impoverishment of humanity.
Since Malthus, world population has increased
sixfold, yet living standards are higher than ever.
Malthus omitted the effects of technological
progress.