I have a question. Your slide says that high depreciation causes high GDP. Really? For example, in the Solow model, the higher the depreciation rate, the lower the GDP. And it doesn't seem to be logical either. The higher the depreciation rate, the more investment is required just to keep the capital level at what it was before, and the less can be used as productive. Or have I misunderstood something?
Thank you for the observation. Yes, maybe my formulation is a bit misleading here. What I wanted to highlight in this chapter is the fact that GDP is calculated using gross investment and not net investment (which would, of course, be much more difficult). From a static (short-run) point of view, the need to replace old factories, machines, etc. by new ones may increase gross investment and thereby measured GDP. However, from a dynamic point of view (over the medium- to long-run), higher depreciation implies that the economy would need a greater part of its savings to replace capital. With a constant saving rate, the capital stock would decrease over time when the rate of depreciation increases. Thus, per capita GDP would shrink. This is the dynamic effect of higher depreciation that is captured nicely by the Solow model. Overall, this dynamic perspective actually emphasizes the critique that GDP contains replacement investment. I hope this helps clarifying the issue.
Hello Klaus and thanks for you content. I am an accounting master student. I am very interested in banking supervision and I want to deepen the Diamond Dybvig model that is illustrated in Advanced Macroeconomics by David Romer. Could you please recommend me a math textbook in order to fill the gap with the quantitative aspects of the subject? Since I study accounting and I got a bachelor in management, I should strengthen my math background but I do not know which text to consider to understand that chapter and in general the math behind Romer’s textbook. Thanks a lot
I guess you refer to pages 491-501 in Romer's book? The methods that you need to know as a background for this section are a basic understanding of dynamic economic modeling (difference equations and dynamic optimization with two time periods) and the concept of expected utility. Some parts of this can be found in my videos on optimization in economics (particularly videos 3 and 4) in the following playlist: ru-vid.com/group/PLHCd4G3qW92lp96KSCgby9gMPMDzL_p9_ In general, my recommendation for understanding the maths used in books such as the one by Romer is the book by Sydsaeter et al. (2008) Further Mathematics for Economic Analysis. Another book that I found quite nice is Dixit (1990). Optimization in Economic Theory. I hope any of this is helpful.
