1. Capital Deepening and Nonbalanced Economic Growth Presenter: Dai, Qian

2. 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)

3. The Mechanism of the Paper Nonbalanced Growth (output in the sectoral level) Kaldor Facts Two-sector model Capital deepening Price effect (the elasticity of substitution)

4. Framework of the Paper Preference Population

5. Two sectors and production function The elasticity of substitution Capital depreciation rate:

7. Now consider the case Assumption1: Sector 1 is more labor intensive, Technological progress:

8. Capital and labor market clearing

9. Analysis Normalization: the price of final good A competitive equilibrium: Markets clearing, firms maximize profits, and the households maximize their utility.

10. Technique to solute a competitive equilibrium

11. 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)

12. Def. value function

13. Step 1 In competitive equilibrium, capital and labor in two sectors has the same marginal product.

14. Define the capital share and labor share in sector 1.

15. Proposition 1: in the competitive equilibrium,

16. 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

17. Factor prices in equilibrium:

18. Proposition2

20. Step 2: Dynamics

21. Definition

22. Proposition 3: Dynamic system

23. Nonbalanced growth rate, now define asymptotic growth rate

24. Theorem 1 The growth rate and values of all variables in the steady state.

26. Theorem 2 The saddle-path stable: We should review the dynamic system theory.

27. 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

28. 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.