Department of Economics Econ 202B

University of California, Berkeley GSI: Lorenz Kueng

1. Some Useful Math for the Solow Model

Before we really start to talk about the setting of the model, I’d like to review
some math tools for you.1 Well, the Solow model doesn’t use very fancy math.
So I picked two relatively tricky things, which are not tricky indeed, for us to
take a look at.

1.1 CRS production function F (K, AL)

• (Constant Returns to Scale) First let me check with you this. How
many arguments are there in the production function? Two, right? Even
though we have three variables (K, A and L), the product of A and L,
which is called effective labor, is just one argument.

Constant return to scale means the production function has the following
property
F (cK, cAL) = cF (K, AL) ∀c ≥ 0.

One example you’ll see a lot is the Cobb-Douglas production function

F (K, AL) = K α (AL)1−α . Let’s try to come up with at least two more
examples:

(1). F (K, AL) = aK + bAL, and

1/ρ
(2). F (K, AL) = (aK ρ + b (AL)ρ ) .

In our context, we call this property of the production function “constant

return to scale”. In a more general sense, or in a mathematical sense,
what’s the name for a function with such property? It is called a homo-
geneous function of degree one. For a detailed discussion of homogeneous
functions, you can check M.B. of Mas-Colell Winston and Green (MWG).
I didn’t review it this time. But I strongly suggest you to take a look. In
a moment, I’ll show you an example where if you know some properties
of the homogeneous functions, things can be done in a much easier way.
1
These notes are based on Li Zeng’s section handout.

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Department of Economics Econ 202B
University of California, Berkeley GSI: Lorenz Kueng

BTW, degree one is referring to the power of c on the right hand side. If
F (cK, cAL) = c2 F (K, AL), then it is a homogeneous function of degree 2.
And a production function with such property has an increasing return to
scale.

• (intensive form) One of the most useful implication of this property of

the production function is that it allows us to use the intensive form of
1
the production function, which is a very convenient tool. Let c = AL , we
have  
F (K, AL) K 
=F , 1 = F (k, 1) ≡ f (k)
AL AL
≡k

Some of you may feel uncomfortable with this last step, that is, define
F (k, 1) as f (k). To see this more clearly, let’s check our previous examples.
F (K,AL) K α


– If F (K, AL) = K α (AL)1−α , then f (k) = AL
= AL
= kα.
F (K,AL) K
– If F (K, AL) = aK + bAL, then f (k) = AL
= a AL + b = ak + b.
1/ρ
– If F (K, AL) = (aK ρ + b (AL)ρ ) ,
K ρ

1/ρ
then f (k) = F (K,AL) = (ak ρ + b)1/ρ .


AL
= a AL
+ b

As we can see from these example, the intensive production function, f ,

indeed is just a one-variable function. It’s argument, k, is called capital
stock per effective labor. It’s also easy to see from these examples that the
intensive production function f is not necessarily a homogeneous function
of degree one.

• (Euler’s formula) Another useful property of homogeneous functions

is called the Euler’s Formula. It’s saying that if, for example, f (x, y) is
homogeneous of degree one, then ∂f ∂x
· x + ∂f
∂y
· y = f (x, y). If instead
f (x, y) is homogeneous of degree two, then on the right hand side of the
equation we’ll have to multiply f (x, y) by a constant 2. We’ll talk about
the application of this when we see it in the exercise. Again, more details
can be found in M.B. of MWG.

• (some properties) Some properties of F (·) translate to f (·).

– F (0, 0) = 0 ⇒ f (0) = 0

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Department of Economics Econ 202B
University of California, Berkeley GSI: Lorenz Kueng

– FK > 0 ⇒ f 0 (k) > 0

=K
z}|{
To see this: f 0 (k) = dk
d 1
[ AL F (kAL, AL)] = 1
F
AL K
· AL = FK > 0
– FKK < 0 ⇒ f 00 (k) < 0
=K
z}|{
00 d 0 d
To see this: f (k) = dk
f (k) = F (kAL, AL)
dk K
= AL·FKK (K, AL) >
0 (if AL > 0).

However, note that F 6= f in general. It is easy to get confused. FK =

f 0 (k) is only a special case. For example, as already mentioned above,
f (·) has in general not CRS even if F (·) is linear homogeneous.

1.2 Chain rule

The second thing I want to talk about today is the chain rule. The chain rule
in calculus is not difficult at all. Simply put, it’s just

dg(y(x)) dg dy
= · .
dx dy dx

Now let’s take a look at some of its applications.

• (growth rates)In this course, we always define the growth rate of vari-
Ẋ
able, say X, as X . This is equivalent to d lndtX . Why? By the chain rule
d ln X
dt
= d dX
ln X dX
dt
= X1 Ẋ = X Ẋ
. This technique to obtain growth rates is
often called ”Taking Logs And Differentiate” (TLAD).

– Suppose Ẋ
X
≡ dtd ln Xt = g. Integrating both sides to solve this differ-
ential equation yields
Z Z
d
ln Xt dt = gdt = gt + k
dt
| {z }
=ln Xt

Initial condition for t = 0 yields k = ln X0 , hence

ln Xt = ln X0 + gt ⇒ Xt = X0 egt

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Department of Economics Econ 202B
University of California, Berkeley GSI: Lorenz Kueng

– For X · Y , TLAD yields

d d d ln X d ln Y Ẋ Ẏ
ln(XY ) = [ln X + ln Y ] = + = + .
dt dt dt dt X Y

Ẋ Ẏ
Similarly, for X/Y , TLAD yields X
− Y

– For X α , TLAD yields α Ẋ

X
.2

• Now, let’s take a look at another application of the chain rule.

In addition to CRS, in yesterday’s lecture we also made assumptions on
the production F , like FK > 0 and FKK < 0. Then immediately we
said that this had implications for f (k). We should have f 0 (k) > 0 and
f 00 (k) < 0. It seems natural and it feels right, but have you asked yourself
why? Now let’s take a look.

– Prove f 0 (k) = FK (K, AL).

First let me show you a clumsy way to do this.
h i
F (K,AL)
df (k) dF (k, 1) d AL 1 ∂F (K, AL)
f 0 (k) = = = =
dk dk dk AL ∂k
1 ∂F (K, AL) dK ∂F (K, AL)
= = = FK (K, AL).
AL ∂K dk ∂K

Well, this is a natural way of thinking, but it looks ugly. However,

let me assure you. The math used in the Solow model won’t get
much uglier than this. So you should be very confident about all the
derivations.
2
Since we have these tools now, let me deviate a little, and show you how to derive k̇ from
the equation K̇ = sY − δK. We’ve seen this at least once in class. I’ll repeat it once here.
And you’re going to see it many many more times in the future.
If you forget how to derive it, first remind yourself that we talked about this when he discussed
the definition of growth rate. What’s growth rate? It has the form Ẋ/X. We have K̇ here,
so why don’t we divide it by K. What do we get? We get K̇ Y
K = s K − δ.
The next thing is to remember K = ALk, therefore we have K̇ k̇ Ȧ L̇ k̇
K = k + A + L = k + n + g.
Well, doesn’t this look good?
The next thing is to move n + g to the right hand side. Since we only need k̇, we just
Y
multiply both sides by k. On the right hand side, we’ll have s K/k − (n + g + δ)k, which is
Y
just s AL − (n + g + δ)k = sf (x) − (n + g + σ)k.

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Department of Economics Econ 202B
University of California, Berkeley GSI: Lorenz Kueng

Now let me show you another smart way to show this. Since F is
homogeneous of degree one, its partial derivative is a function of
degree zero. That means,

K
FK (K, AL) = FK ( , 1) = FK (k, 1) = f 0 (k)
AL
The last step may look a little confusing to you. But notice, the
subscript K just means partial derivative with respective to the first
argument. In this case, it’s just k.
– Calculate f 00 (k).

df 0 (k) dFK (K, AL) dK

f 00 (k) = = = FKK (K, AL) = AL·FKK (K, AL).
dk dk dk

• (comparative statics) Later on we’ll also see the following

∂y ∗ ∂(f (k ∗ )) ∂k ∗
= = f 0 (k ∗ )
∂s ∂s ∂s
where y ∗ is output per effective labor on the balanced growth path and s
is the saving rate.

• (inverse function theorem) Suppose y = f (x). By definition of the

inverse function (f −1 ◦ f )(x) = x and by the chain rule we obtain

d df −1 df
[(f −1 ◦ f )(x)] = (y = f (x)) · (x) = 1
dx dy dx

Therefore
df −1 1 1
(f −1 )0 (y) ≡ (y) = 0 = 0 −1
dy f (x) f (f (y))

2. Big picture for the Solow Model

That’s pretty much what I want to say about the math tools used in the Solow
model. Now let’s take a quick review of what we have covered in the class.

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Department of Economics Econ 202B
University of California, Berkeley GSI: Lorenz Kueng

I always feel that the easy way to remember things is to first know the big
picture, and then get to the details. So, what are the big steps we take when
we discuss the Solow model?

(1). Set up the model (assumptions)

• At a point of time: production function.

(i) Labor-augmenting / Harrod neutral technology: AL. (Why?
With this assumption, K
Y
will eventually set down to a constant,
K∗ k∗ s
Y∗
= y∗ = n+g+δ .)
(ii) CRS
(iii) About marginal productivities
• Over time: evolution of inputs.
Ȧ
(i) A: g = A , with A(0) > 0 given; (ii) L: n = LL̇ , with L(0) > 0
given; (iii) K = sY − δK, with K > 0 given; (iv) n + g + δ > 0.

(2). Find the balanced growth path (steady state equilibrium/solution)

• Condition for steady state: sf (k ∗ ) = (n + g + δ)k ∗

• Graph

BTW, why we want to find the balanced growth bath? Usually after we
figure out the balanced path, we will then check two things. (i) Conver-
gence: If the economy is off the BGP, whether or not it will converge
to the BGP over time. (ii) When we analyze the dynamics quantitively,
usually we’ll linearize the system around the steady state.

(3). Comparative statics (not difficult, should have some of this kind of exer-
cises in PS1).

(4). Dynamics: (i) qualitative analysis; (ii) quantitative analysis.

(5). Empirical application.