Aggregate models of economic dynamics

Abstract

This chapter explores aggregate optimization models of the neoclassic economic growth theory, which are based on the concept of production functions. The models are described by ordinary differential equations and involve static and dynamic optimization. Section 2.1 analyzes production functions with several inputs, their fundamental characteristics, and major types (Cobb–Douglas, CES, Leontief, and linear). Special attention is given to two-factor production functions and their use in the neoclassic models of economic growth. Sections 2.2 and 2.3 describe and analyze the well-known Solow–Swan and Solow–Ramsey models. Section 2.4 contains maximum principles used to analyze dynamic optimization problems in this and other chapters.