a.

Use equations I, II and III to write the accumulation equation for capital per effective
unite of labor m
K
AL
log differenciating ,
ln(m) = ln( K ) ln( A) ln( L)
d ln( m) d ln( K ) d ln( A) d ln( L)
=

dt
dt
dt
dt
&
&
&
m& K A L
=
m K A L
with :
A&
=g
A
L&
=0
L
K& = sY K
m=

Y = K ( AL)1
substituting :

m& sK ( AL)1 K
K K
=
g = s

g
m
K
AL AL
m&
m
=s
g
m
m
m& = sm ( + g )m
b. solve for the steady state level of m
m& = sm ( + g )m

in steady state:
m& = 0

sm ( + g )m = 0
sm 1 ( + g ) = 0
( + g )
m 1 =
s
1

( + g ) 1
m ss =

c. What is the steady state growth of GDP per capita in this model?
In steady state:

m& = 0
K
AL
log differenciating ,
m=

ln(m) = ln( K ) ln( A) ln( L)

d ln(m) d ln( K ) d ln( A) d ln( L)
=

dt
dt
dt
dt
&
&
&
m& K A L
=
m K A L
with :
A&
=g
A
L&
=0
L
m& = 0
substituting :
K&
=g
K
now,
Y& d ln(Y )
=
Y
dt
ln(Y ) = ln( K ) + (1 ) [ ln( A) + ln( L) ]
A& L&
d ln(Y )
K&
K&
A&
= + (1 ) + = + (1 )
dt
K
K
A
A L
therefore,
Y&
= g + (1 ) g = g
Y

d. What happens to GDP per capita (y) when K falls (at time T)? Will the growth rate of
GDP per capita be higher or lower?
Y = K ( AL)1

Y K 1
= A
L L
ln y = (ln K ln L) + (1 ) ln A
y=

d ln y
= y,K =
d ln K

GDP per capita falls less than proportionally, when K falls.

Y
L
log differenciating
y=

ln y = ln Y ln L
d ln y d ln Y d ln L
=

dt
dt
dt
y& Y& L&
=
y Y L
given,
L&
=0
L
then,
y& Y&
=
y Y
knowing ,
y& Y&
K&
A&
= = + (1 )
y Y
K
A
y&
A&
sY

=
+ (1 )
y
A
K

y&
A&
= sK 1 ( AL)1 + (1 )
y
A
&
d y
y
= ( 1) s ( AL)1 K 2 0
dK

A decrease in K will increase the growth rate of GDP per capita.

e. Draw a graph with
evolution of

y&
on the vertical axis and time on the horizontal axis, and show the
y

y&
before T and after.
y

y&
y

f. Draw a graph with lny on the vertical axis and time on the horizontal axis, and show the
evolution of lny before T and after.

ln y