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Capital Deepening and Nonbalanced Economic Growth Presenter: Dai, Qian Introduction • Kaldor Facts: a constant growth rate, a constant capital-output ratio, and ect. • A balanced growth consists with Kaldor facts. • Nonbalanced growth (approximately consistent with Kaldor facts): – Structural changes – Engel’s law (demand side) The Mechanism of the Paper Nonbalanced Growth (output in the sectoral level) Capital deepening Two-sector model Price effect (the elasticity of substitution) Kaldor Facts Framework of the Paper • Preference • Population • Two sectors and production function • The elasticity of substitution • Capital depreciation rate: • Now consider the case • Assumption1: Sector 1 is more labor intensive, • Technological progress: • Capital and labor market clearing Analysis • Normalization: the price of final good • A competitive equilibrium: • Markets clearing, firms maximize profits, and the households maximize their utility. Technique to solute a competitive equilibrium How to characterize the equilibrium • Step 1. Given K, L, M, the allocation maximizes Y(t). (static equilibrium) • Step 2: choosing the dynamics of K or c to maximize the value function. (dynamics) • Def. value function Step 1 • In competitive equilibrium, capital and labor in two sectors has the same marginal product. • Define the capital share and labor share in sector 1. • Proposition 1: in the competitive equilibrium, Implications of proposition 1 • The elasticity of substitution implies: • An increase in K(t) causes an increase in • An increase in M2, causes an increase in • Factor prices in equilibrium: Proposition2 Step 2: Dynamics • Definition • Proposition 3: Dynamic system Nonbalanced growth rate, now define asymptotic growth rate Theorem 1 • The growth rate and values of all variables in the steady state. Theorem 2 • The saddle-path stable: • We should review the dynamic system theory. Calibration • The main logic of calibration • To set up the economic system (based agent behavior) • To specify the parameters of the model and run the model. • To compare the outcome to the factual data and then return to tune the initial parameters How to apply calibration in the paper? • Calibration is based on a benchmark model, which depicts agent’s behavior, economic mechanism, and ect.. (the benchmark model in the paper, section II) • Specifying all related exogenous variables (section III) – Classification of industries – Specifying variables – Running the outcome and comparing the results to the factual data.