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3.2 - Capital Accumulation: KAcc.xls

from 3 - The Solow Model

Published online by Cambridge University Press:  05 May 2016

Humberto Barreto
Humberto Barreto
Affiliation:
DePauw University, Indiana
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Summary

Moreover, the production function has been a powerful instrument of miseducation. The student of economic theory is taught to write O = f(L, C) where L is a quantity of labour, C a quantity of capital and O a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labour; he is told something about the index-number problem involved in choosing a unit of output; and then he is hurried on to the next question, in the hope that he will forget to ask in what units C is measured. Before ever he does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.

– Joan Robinson

Quick Summary

To access KAcc.xls, visit

http://www.depauw.edu/learn/macroexcel/excelworkbooks/SolowModel/KAcc.xls

KAcc.xls includes several sheets that carefully explain capital accumulation in a basic version of the Solow Model (no population growth or technological progress) and an EqPath sheet that enables quick simulation of an economy, along with a series of charts to display results.

Screencasts

  1. • http://vimeo.com/econexcel/kacc: introduces the Solow Model and shows how to use the EqPath sheet to run a simulation and find the steady-state solution

  2. • http://vimeo.com/econexcel/kacccs: copies the EqPath sheet and does comparative statics analysis via direct comparison of two economies

Introduction

To teach the Solow Model effectively, the material must be chopped into bite-sized pieces. KAcc.xls introduces the model, focusing on the core, iterative mechanics at the heart of the model. It also shows how capital accumulates when starting below the steady-state, and then settles into a repetitive pattern that is the hallmark of the steady-state. This simple model can generate only catch-up growth (with no growth in the steady-state), so it is clearly a stepping-stone that must be extended to exhibit persistent, long-run growth.

Common Problems for Students

Not only are almost all students unfamiliar with dynamic models, most find the notation of the Solow Model to be a significant barrier. Solow (1956) cleverly transformed a two-variable, L and K, system into a single variable, k = K/L, model, but undergraduate students tend to overlook the levels versus per worker distinction in the variables. It is important to continually stress and write out the variables, for example, “output per worker,” instead of merely using y.

Type
Chapter
Information
Teaching Macroeconomics with Microsoft Excel® , pp. 61 - 71
Publisher: Cambridge University Press
Print publication year: 2016

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References

The epigraph is from Robinson, J., “The Production Function and the Theory of Capital,” Review of Economic Studies 21, no. 2 (1953–54): 81, http://www.jstor.org/stable/2296002. This is a key paper in the decades-long Cambridge capital controversies and Robinson pulls no punches, with her first sentence claiming that the dominance of the neoclassical production function “has had an enervating effect upon the development of the subject.”Google Scholar
The Final sheet in KAcc.xls provides the citation for the original version of the model: Solow, R., “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70, no. 1 (1956): 65–94, http://www.jstor.org/stable/1884513.Google Scholar
The Final sheet also mentions Trevor Swan's paper, published later in the same year: Swan, T., “Economic Growth and Capital Accumulation,” Economic Record 32, no. 63 (1956): 334–61. In this paper, which gave rise to the term “Solow–Swan Model,” Swan tries to “put up a scarecrow (as Joan Robinson calls it) to keep off the index-number birds and Joan Robinson herself” (343). Swan says, “Capital is made up of a large number of identical meccano [erector] sets which never wear out and can be put together, taken apart, and reassembled with negligible cost or delay in a great variety of models so as to work with various combinations of Labour and Land” (344). Economists quickly gave up the pretense of trying to defend the model from the index-number birds and simply assumed them away.Google Scholar
Novales, A., Fernández, E., and Ruíz, J. 2009. Economic Growth: Theory and Numerical Solution Methods. Springer.

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