Review: How does RCK model handle government? 

Diamond Model

Assumptions:
\(r_t = f'(k_t)\)
\(w_t = f(k_t) - k_t f'(k_t)\)
This gives us the ability to maximize the equations. The first-order-conditions imply:
Dynamics of the economy:
\(L_{t + 1} = (1 + n) L_t\)
\(A_{t + 1} = (1 + g) A_t\)
Evolution of k over time
\(\frac{1}{2 + \rho}\)
\(k_{t + 1} = \frac{1}{(1 + n)(1 + g)} \frac{1}{2 + \rho} (1 - \alpha) k_t ^\alpha\)
Properties of steady state:
Dynamic Inefficiency
Food for thought:

Introducing Government in the Diamond Model

How does the government change the steady state results in this model?

Problems with all our models...

Cannot explain difference in income per capita
Growth rate of tech. progress is exogenous
Effect of policy variables on growth (e.g. an increase in savings rate or decrease in rate of time preference) appear to be small

4.1 and 4.2: Human Capital

\(Y_t = K_t^\alpha [A_t H_t] ^{1 - \alpha} \)
Determinants of human capital: 
Dynamics are exactly the same as the Solow model = thus bad because it still leaves g (growth of A) unexplained 
Look at growth accounting (slideshow) 
Differences in income per capital = fraction of capital invested + differences in skilled and unskilled + "A" catching all else