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Modeling the Growth of the World Economy: The Basic Overlapping Generations Model

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

Abstract

This chapter is devoted to a simple modeling of the growth of the world economy. To this end a log-linear, CD version of Diamond’s (American Economic Review, 55, 1126–1150, 1965) neoclassical growth model is used as basic overlapping generations (OLG) growth model. This is then extended across several further dimensions in the following chapters. As a simple but complete intertemporal general equilibrium model, it comprises the optimization problems of agents (younger and older households as well as firms) and the market clearing conditions for each model period. The fundamental equation of motion of the efficiency-weighted capital intensity is derived from the first-order conditions for household’s utility and firm’s profit maximization and from labor and capital market clearing conditions. The “golden rule” of capital accumulation ensures that consumption per efficiency capita is maximized over the long run.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2021. "Modeling the Growth of the World Economy: The Basic Overlapping Generations Model," Springer Texts in Business and Economics, in: Growth and International Trade, edition 2, chapter 2, pages 31-55, Springer.
    • Handle: RePEc:spr:sptchp:978-3-662-62943-7_2
    DOI: 10.1007/978-3-662-62943-7_2
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