Introduction to Modern Economic Growth until the 1970s have made many economists prefer models with balanced growth to those without It is not literally true that the share of capital in output and the capital-output ratio are exactly constant For example, since the 1970s both the capital share and the capital-output ratio may have increased depending on how one measures them Nevertheless, constant factor shares and a constant capital-output ratio are a good approximation to reality and a very useful starting point for our models Also for future reference, note that the capital share in national income is about 1/3, while the labor share is about 2/3 We are ignoring the share of land here as we did in the analysis so far: land is not a major factor of production This is clearly not the case for the poor countries, where land is a major factor of production It is useful to think about how incorporating land into this framework will change the implications of our analysis (see Exercise 2.7) For now, it suffices to note that this pattern of the factor distribution of income, combined with economists’ desire to work with simple models, often makes them choose a Cobb-Douglas aggregate production function of the form AK 1/3 L2/3 as an approximation to reality (especially since it ensures that factor shares are constant by construction) For us, the most important reason to start with balanced growth is that it is much easier to handle than non-balanced growth, since the equations describing the law of motion of the economy can be represented by difference or differential equations with well-defined steady states Put more succinctly, the main advantage from our point of view is that balanced growth is the same as a steady-state in transformed variables–i.e., we will again have k˙ = 0, but the definition of k will change This will enable us to use the same tools developed so far to analyze economies with sustained growth It is nevertheless important to bear in mind that in reality, growth has many non-balanced features For example, the share of different sectors changes systematically over the growth process, with agriculture shrinking, manufacturing first increasing and then shrinking Ultimately, we would like to have models that combine certain quasi-balanced features with these types of structural transformations embedded in them We will return to these issues in Part of the book 81