ECON 314 Lecture Notes - Lecture 13: Diminishing Returns

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But the total output (y) grows at rate n. Implications for savings: an increase of savings rate leads to higher steady state levels of k and y. Implications for population: high population growth rates lead to lower steady state level of k and y. It doesn"t provide a mechanism for growth over an extended period of time. Short run growth is attributed to technological progress = solow. It is difficult to analyze the determinants of technological advancement because it"s outside of the model. It fails to explain the large differences in the residual across similar countries. It seems to suggest that capital will move from more advanced countries to less developed countries (because returns would be higher) - but clearly this is not actually happening. The need to explain income differences across countries. The need to explain the significant economic growth observed. It relies on externalities from investment on capital as the source of growth - y = ak.

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