Topics likely to be covered on the midterm

  1. What is (micro)economics?
  2. What is dynamics?
  3. The Solow model of growth:
    • variables and equations
    • assumptions on parameters and their rationales (e.g., why is s constant? F exhibits constant returns to scale.)
    • idea of steady state in per capita
    • characteristic equation: k' = sf(k) - (n + d)k
    • phase diagram (axes have k' vs. k; graphs of sf(k) and (n + d)k
    • comparative statics of steady state (what happens if s, n, or d changes?)
    • Solow's "Golden Rule"
      • What is the optimization problem? Choose s to maximize c in the steady state.
      • Why is this the "natural" optimization problem in this model? (s is the only controllable parameter, while c is the variable that corresponds most closely to individual welfare.)
  4. Technological progress in the Solow model
    • Only way to achieve steady-state per-capita growth; manifests as growth in total factor productivity (TFP)
    • "Neutral" technological progress: Harrod-neutral ("labor-enhancing"), Hicks-neutral ("TFP-enhancing"), Solow-neutral ("capital enhancing")
    • Solow-style model with technological progress: easily solved if progress is Harrod-neutral.
    • growth accounting: contribution to GDP growth by growth in capital and labor, and productivity improvement (the "Solow residual")
  5. The convergence hypothesis
    • Why does the Solow model suggest convergence may occur?
    • Interpretation of y' vs. y diagram
  6. Interpreting differential equations
  7. Bellman's Principle of Optimality (equivalence of solution of dynamic program to recursive solutions to value function equations)
  8. Exhaustible resources
    • Pure exhaustible vs. renewable ("self-renewing") resources existing as stocks (oil vs. tuna fish) vs. "renewable" resources existing as flows (solar power)
    • Interpretation of various assumptions on natural rate of increase
    • Own rate of return