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“Guys and welcome to the first video in my series on the solo growth model. Model. This is part of a wider set of videos that i ll be creating bachelor level economics so the structure of this series of the solo growth model will fundamentally be broken down into three parts. We re very briefly looking at what the silla growth model actually is and what it shows and that s what we ll be looking at in today s video and other tutorials.
We ll be looking at the model with no technological progress and then we ll be looking at the model with technological progress will also be applying these models by changing different variables and seeing how the economy should react so we can very simply look at what the solo growth model shows by looking at the business cycle. Now the business cycle shows levels of real output relative to the time and it shows that over time we get pigs in gdp and we get troughs. So for example. A peak would have been 2006 and a trough would perhaps be 2010.
And it shows that over time actually gdp is increasing. And it can be shown through this dotted blue line and this dotted blue line is always increasing. So we have short term fluctuations and pink s and troughs. But over the long term in the economy gdp is actually increasing and the solar growth model actually explains this and what how it explains this is through technological progress so i m just going to write technology.
Then and the celebrate model essentially says that this dotted blue line is caused by technological progress. But it s not caused by capital so capital. It is not caused by that and the reason for this is that capital has decreasing returns to scale in economy. So if you keep increasing capital when they fix labor supply you re not going to increase output continuously.
Because you ll reach a steady state. Now i m going to explain what that steady state actually is later on in the video. But for the moment. All you need to know the silla growth model is that technology or technological progress is what causes long term and growth gdp levels not increases in capital.
So we can explain a sonido model through a set of three curves as illustrated on the screen on the x axis. We have a little k. And little k. Is capital per worker.
So we can rewrite this as capital k. Divided by n. Where capital k. Is the overall amount of capital in the economy and n.
Is the overall amount of people who are in the workforce and y is a little y is equal to output per worker. So again we can rewrite this as capital y. The overall output in the economy. Divided by n.
The number of people in the economy. So we have these free curves here and what we can do is explain and the seller growth model through these free curves. So we re going to start off with the depreciation curve and the depreciation curve is this straight line that goes up and essentially all those curve shows as that as we increase capital. We get an increase in depreciation essentially depreciation is proportional to the amount of capital and make on me.
And this makes intuitive sense as you increase the amount of capital. The amount of depreciation. I how how often your machine is going to fall t is likely to increase so depreciation is upward sloping relative to the amount of capital up here. We have out per worker is some factor of capsule per worker.
And again this makes sense. As you increase the amount of capital per worker. You re going to get an increase in output per worker and we re going to say that investment here investment is some factor of output per worker. But we re going to multiply that by the savings rate.
The reason for this is that savings are relative to investments. The idea in the model is that the amount that you save is then spent on investment. So let s just look intuitively at what the model actually shows so let s take a point on the graph for example here. And we re going to here.
Here. So at this level of capital per worker. And what it actually shows is that the investment is above the depreciation and hence therefore the level of investment in the economy is going to increase whereas for example. If we go here.
The depreciation is above the investment function and therefore we re going to get a decrease in an investment net investment in the economy so this leads to us reaching a steady state equilibrium here and the reason for that is because here. You re going to get an increase in investment because investment exceeds. Depreciation and here you re going to get a decrease in investment because the appreciation exceeds investment and hence therefore your economy will always end up at the steady state equilibrium labeled. Sse and since investments will always increase to this certain point and then above this point it will depreciate so that explains the fundamentals of the seller growth model in other tutorials.
We re going to be talking about how to derive this mathematically at the moment. That s the fundamentals of the model. Please comment like and subscribe to my ” ..
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