In Acemoglu's book "Introduction to Modern Economic Growth" there is Proposition 8.3 which states that the impact of a change in the population growth rate on the steady state capital-labour ratio is zero. However, I was not able to prove this, which is asked in Exercise 8.17 as well. It makes more sense that this effect is negative. Can anyone offer an explanation to why this effect should be zero?

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Adding my attempt:

We have two differential equations:

$\frac{\dot c_t}{c_t}=\frac{1}{\epsilon_u}(A\tilde f'(k(t))-\rho-\delta)$

$\dot k_t = f(k(t)) -(n+\delta)k(t) -c(t)$

For the steady state $\frac{\dot c_t}{c_t}=0$, since $\epsilon_u<0$ it has to be the case that $\tilde f'(k^*)=\frac{\rho+\delta}{A}$. Then,

$k^* = \tilde f'^{-1}(\frac{\rho+\delta}{A})$ .

Since $\tilde f(k(t))$ is concave in $k(t)$ then $\tilde f'(k(t))$ is strictly decreasing. Hence by the inverse function theorem, we have the result that $\frac{\partial k^{*}}{\partial A} >0,\frac{\partial k^{*}}{\partial \rho} <0$ and $\frac{\partial k^{*}}{\partial \delta} < 0$. Moreover $\frac{\partial k^{*}}{\partial n} = 0$ since $n$ is not an argument of $k^{*}$.

So I am confused here because then I do not understand why Acemoglu wrote $k^* = k^*(A,\rho,n,\delta)$ if $n$ is not an argument of $k^{*}$.

Furthermore we have to show that $\frac{\partial c^{*}}{\partial n}<0$. For this I use the law motion of capital and set it equal to zero and re-arrange in terms of $c^*$,

$c^* = f(k^*) -(n+\delta)k^*$.

Differentiating w.r.t $n$,

$\frac{\partial c^*}{\partial n}= f'(k^*)\frac{\partial k^*}{\partial n} -k^* - n\frac{\partial k^*}{\partial n}$

If $\frac{\partial k^*}{\partial n}=0$ then the above reduces to,

$\frac{\partial c^*}{\partial n}= -k^* <0$.

So my question would be, am I correct in using the inverse function theorem? Are my derivations accurate?

  • $\begingroup$ Sure, will edit asap with what I have tried so far. This is not a homework though, it is a Proposition in the book with the proof postulated as an exercise. Fairly typical for such books but quite annoying if the proposition is not typical. $\endgroup$ Dec 2, 2021 at 10:38
  • 2
    $\begingroup$ @DenisDinand the policy applies to both homework and self study $\endgroup$
    – 1muflon1
    Dec 2, 2021 at 10:56
  • $\begingroup$ Thank you for the feedback, I will adapt the question and my future comments. $\endgroup$ Dec 2, 2021 at 11:21
  • $\begingroup$ Dear contributors, could you check my edited submission? Is it better in terms of the policies? $\endgroup$ Dec 2, 2021 at 12:46

1 Answer 1

  1. $n$ has no effect on $K/L$ ratio simply because $n$ does not show up in the Euler. This is however, dependent on how your write the objective function. In your formulation, you have $e^{-\rho t}U(c)L$ under the integral.

  2. You can (almost) avoid derivatives. Diminishing marginal product of $f(k)$ implies the following:

When $\rho$ increases, $f’(k^*)$ rises, which then must be consistent with lower $k^*$.

  • $\begingroup$ It might be constructive to say why you (the downvoter), think the answer is not good. :) $\endgroup$
    – erik
    Dec 3, 2021 at 8:19

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