ECON 1102 Lecture Notes - Lecture 5: Diminishing Returns, Physical Capital, Marginal Product
Document Summary
The solow model: total output, y, of an economy depends on, physical capital: k, human capital: education x labor = el. Ideas: a: this can be expressed as: (production function, y = k(a,k,el) Depreciation: depreciation is the amount of capital that wears out each period, depreciation rate (8) - fraction of capital that wears out each year, d = depreciation/k or 8k. Is capital the only key to growth: as capital increases, depreciation increases at a constant rate = 8, output increases at a diminishing rate. Investment is a constant fraction of output: at some point depreciation will equal investment, the capital stock will stop growing (steady state, output will stop growing. If investment > depreciation - k and y grow. If investment < depreciation - k and y fall. If investment = depreciation - k and y are constant.
