Economic growth and economic development 414

Introduction to Modern Economic Growth c(t)=0 c(t) c** c* k(t)=0 k* k** kgold k k(t) Figure 8.2 The dynamic response of capital and consumption to a decline in the discount rate from ρ to ρ0 < ρ 8.8 The Role of Policy In the above model, the rate of growth of per capita consumption and output per worker (per capita) are determined exogenously, by the growth rate of laboraugmenting technological progress The level of income, on the other hand, depends on preferences, in particular, on the intertemporal elasticity of substitution, 1/θ, the discount rate, ρ, the depreciation rate, δ, the population growth rate, n, and naturally the form of the production function f (·) If we were to go back to the proximate causes of differences in income per capita of economic growth across countries, this model would give us a way of understanding those differences only in terms of preference and technology parameters However, as already discussed in Chapter 4, and we would also like to link the proximate causes of economic growth to potential fundamental causes The intertemporal elasticity of substitution and the discount rate can be viewed as potential determinants of 400