Grasping Reality on TypePad, by Brad DeLong

Lecture: September 12: Using the Solow Model

How to Use the Solow Model: Three Steps

1. What is the steady-state growth path?
2. Figure out where the economy is now relative to its steady-state growth path?
3. Calculate how the economy converges to its steady-state growth path

Basic Formulas:

(K/Y)(t) = [(s/(n+g+d)) + [(K/Y)(0) - (s/(n+g+d))]exp[-(1-a)(n+g+d)]]

(Y/L)(t) = ((K/Y)(t))^(a/(1-a))E(0)exp(gt)

Steady State:

(K/Y)* = s/(n+g+d)

(Y/L)* = (s/(n+g+d))^(a/(1-a))E(0)exp(gt)

Numerical Experiments:

1. Raise g
2. Lower n
3. Raise s