Human Capital in the Solow Model (based on Mankiw, Romer & Weil 1992) Assume that the production function is given by: (Y= KHAL)1−−al where Y is output, K is physical capital, H is human capital, A is the level of technology, and L is labor. Including human-capital accumulation lowers the esti- mated effects of saving and population growth to roughly the values predicted by the augmented Solow model. Modify the Cobb-Douglas prod func: ! Human Capital and Solow Model Econ 4960: Economic Growth Human Capital and Growth Modify the Cobb-Douglas prod func: u is the time investment, and ψ is the returns-to education Per-person output is: Solve for BGP as before to get: So, countries can also have different relative incomes if they have different (human capital) education levels From the production function; output per worker is a function of capital per worker. human capital of workers. diction based on Solow model based on the data from 1960-1985. The basic Solow Model starts with a neoclassical production function Y/L = F(K/L), rearranged to y = f(k), which is the orange curve on the graph. Assu me a > 0, l > 0 and al+<1. MRW built few steps to test Solow model in their paper, starting from the original model, then adding human capital in the equation, testing the endoge-nous growth and convergence, lastly, they put interest rate differentials and cap-ital … Per-person output is: ! Others demonstrated that the growth of knowledge and other “non-rival” goods meant that some of the implications of the The Solow model is thus able to predict that countries with high rate of population growth will have lower level of capital per worker and, thus, lower level of GDP per … Solve for BGP as before to get: ! in practice, capital is machinery, need assumptions about how relative ... Return to basic Solow model with constant population growth and Therefore this model is the common starting point for studying Economic Nevertheless, these ratios climbed for several countries in the 20th century, including the US (see about 1965 to 1990). With simple but powerful assumptions the Solow-Swan model results are clear and consistent. The Solow-Swan Model is the baseline of the Neoclassical Economic Growth Models. THE SOLOW MODEL WITH HUMAN CAPITAL • More or less the same micro world as in the Solow model • The same types of agents: one type of (representative) firms and one type of (representative) consumers - and possibly a government sector • But the firm now uses human capital in its production and • the consumer also accumulates human capital. human capital is in fact correlated with saving and population growth. This was the arrival of the Baby Boom into the workforce, which raised the proportion of workers to population, and which is now starting to disappear as that generation ages. So, countries can also have different relative incomes if Finally, the integration of human capital as a factor of production in the augmented Solow model causes changes in the results, particularly in the amplitude of the coefficients. measurement of capital inputs: in the theoretical model, capital corresponds to the –nal good used as input to produce more goods. L and A grow at constant rates n and g, respectively. Moreover, the augmented model accounts for about 80 percent of the cross- Some researchers devised methods to close the “residual” gap by adding human capital growth to the Solow model (Mankiw, Romer & Weil, 1992). u is the time investment, and ψ is the returns-to education ! Human Capital and Solow Model Econ 4960: Economic Growth Human Capital and Growth ! 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