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Chap8 Inclass Macro Notes.doc

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Temple University
ECON 1901
Nathan Blascak

02/26/14, 02/28/14,03/10/14, and 03/12/14 Chapter 8: Assumptions Investment Depreciation -the percentage of a country’s capital stock that depreciates= delta *higher levels of capital stock --> more depreciation • so every year we invest some GDP -some capital is needed to replace old capital -some goes to help the economy grow in size • For the capital stock to grow: -investment > depreciation increase in capital is greater than the wearing out of capital -investment < depreciation capital wears out faster than it is replaced -economy is shrinking investment =depreciation -you add just enough capital to replace the old capital -implies no economic growth --> “steady state” Investment recall: our assumption of diminishing product of capital -at low levels of K, adding an additional unit is very productive -that at high levels of K, adding an additional unit is not very productive • Low levels of K -the marginal product of capital is high -there is an incentive to invest -depreciation is low • At high levels of K -the marginal product of capital is low - “too much capital” low incentive to invest -depreciation is high High Levels of Capital Stock • the marginal product of capital is low • less incentive to add capital ; investment declines • “too much capital” -investment --> low -deprecation --> high • we have declining capital stock -investment less new investment) • as capital stock grows, depreciation increases • so output growth decreases (additional output is less every year) -no growth in capital stock -no growth in GDP • our diminishing returns assumption implies that capital will eventually stop growing • convergence Solow model does NOT explain long-run growth • lo
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