Due in discussion section the week of March 11 - 15 R&D; in the Solow Growth Mod

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Due in discussion section the week of March 11 - 15 R&D; in the Solow Growth Model. The basic Solow growth model has either no technological progress or assumes that technological progress occurs exogenously. Here I allow for the possibility that technological progress occurs as a result of research and development (R&D;). Consider an economy in which technological progress occurs only if people do research (R&D;). People either work or they do research (some people work in factories and some work in labs). Let n f be the number of people working in factories and let r&d; be the number working on R&D.; The economy is described by the following equations: The total amount of labor is fixed at N= 1. This labor is split between R&D; and productive work. The fraction engaged in R&D; is given by z while the remainder (1 - z) work in factories making output (e.g. if z = 1/2 then half of the people work in the factories making goods and services while the other half spend their time doing research on new production techniques). Note: >0 so as more and more people do research, technology grows faster and faster. What is meant by a balanced growth path? Solve for the balanced growth rate of this economy. This is somewhat difficult - here is a "roadmap": First, read the question carefully Then, plug in for I and n I f to get a single equation in the variables K t+1, K t A t. Use the balanced growth condition and A t+1 = A t(1 + n t r&d;) to find K t+1/K t terms of z. How do changes in z (the fraction of people devoted to R&D;) affect the long - run growth rate of this economy? What happens to output (Y t) immediately after an increase in the fraction of people doing research?

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http://www.econ.umn.edu/~vr0j/econ10205/lectures/grow5_solow.pdf

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