Posted on : October 17, 2018
Views : 2
Category : Economics
START Video at 05:45…………….The dominant paradigm in growth economics was the neoclassical growth model, which would be taught first under the assumption of a constant savings rate (the Solow model) and then in the context of an economy where a representative consumer decides about consumption, savings and investment by maximizing her intertemporal utility (the Ramsey-Cass-Koopmans model). In a nutshell: the model describes an economy where final output is produced using capital as input, and where therefore it is the accumulation of capital which generates output growth. This corresponds to the first equation of the model. Then the question is: where does capital accumulation come from? This in turn is answered with the second equation of the model: from savings (aggregate savings equal aggregate investment in equilibrium) and savings in the Solow model are a constant fraction of final output (i.e. of aggregate GDP).