Introduction

The development of mathematics is so fast present, especially the logic of

derivatives and integrals which initially were only oriented on the natural

number order, now it is expanded to the fractional-order, encompasing the

rational and real numbers. Although derivatives and integrals with fractional

order are believed to have introduced since 1695, significant developments have

only as occurred in the early 21st century. Thus can be seen from the large

number of scientific papers that examine problems related to derivatives and

integrals with fractional order, and their application s in various fields of science,

including in the fields if engineering and economics.

To find the solution of a fractional Differential Equations (FDE), first it needs to

show that the FDE indeed has a solution. Thus, it is necessary to analyze the

FDE specifically to show the conditions needed to guarantee its existence and

uniqueness to the solution given an initial value for the FDE. An FDE is often

used to model growth incorporating memory effect. Since many economical

processes jave memory effect in their nature, the FDE is a suitable concept to

model the growth of many economical processes. The memory effect is also a

nature in the definition of the fractional derivatives. Hence, calculus fractional

serve as a backbone of the effect of memory on the economic growth model.

Fractional calculus is a generalization of the classical, in general, calculus here

refers to derivatives, integrals, and differential equations. Based on (1),

1
derivatives or integrals with inter-order have local properties (next state is not in

nfluenced by the current and previous state), while fractional derivatives have

non-local properties (the next state depends on the current state and all previous

states). Thus, FDE has a memory effect, because fractional derivatives or FDE

have non-local properties. This is a major advantage ignored. In addition, this

memory effect does not only apply to time variables but can also apply to other

variables, such as price. Financial variables such as asset prices or product prices

require more long-term memory to estimate price fluctuations in future periods

based on fluctuations in the previous period.

Before discussing the theory of the effect of memory on the economic growth

model, first we discuss the notion of economic growth. Economic growth is the

process of changing a country's economic condition towards better condition for

a certain period. Economic growth can also be interpreted as the process of

increasing the production capacity of an economy which is manifested in the

form of an increase in national income. The existence of economic growth is an

indication of the success of economic development in a country. Economic

growth shows the increase in the production of goods and services in a region in

a certain time interval. In general, the higher the level of economic growth, the

faster the process of increasing the output of the region, means that the prospects

for regional development are getting better.

2
 Hence, technically, the economic development is defined as an increase in

output per Capita in the long term (3). When the economic growth is model by

an FDE it means it is assumed that there is a memory effect in the economic

process being modeled. In this paper we will review existing literatures of FDE

both from mathematical development, such as the technical developed by the

authors to find the solution of the FDE, and from application s sides. Special

emphasizing will also be presented on the methods used to prove the existence

and uniqueness of the solution. In general the worth of a review paper is the

compiling, summarizing, criticizing, and synthesizing the available information

on the topic being considered. It is expected that current paper can clarify the

state of knowledge and identify needed research in the area of FDE and its

application (4). The method on how the review is done will be presented on the

following section followed by results and their discussion shaping future

direction of the potential research that could be done.

3
 CHAPTER TWO

some of the most important differential equations developed by economist

during a period spanning over sixty years are presented in this section. Most of

them beginning with Solow's development of a growth model, from Neoclassical

Growth Theory. Which was partly motivated by the works of Harrod and Domar,

are models from Neoclassical Growth. The main postulate of Neoclassical

Growth Theory is that economic growth is driven by three elements: labour,

capital and technology. Economic growth is an important topic in economic and

Solow's growth model is the first topic taught in undergraduate economic

because of its underlying simplicity and importance as argued by Acemoglu (5).

The differential equation by Samuelson is concerned with demand and supply

scenarios. Phillip's work is the earliest attempt to employ classical feedback

control theory in order to steer a national economy towards a desired target. The

remaining works are differential equations with time lags inherently present in

production and capital accumulation. Due to soace limitations, the exposition is

somewhat uneven with full mathematical analyses of most models and cursory

treatments of those with time lags. The choice of the differential equations

presented in this chapter is a judicious one, the lists is by no means exhaustive,

but is meant to afford a glimpse into how the mathematical thinking of some

famous economists has influenced the economic growth theory in the twentieth

century.

4
2.1 Harrod-Domar

The Harod-Domar model was developed independently by Roy Harrod (6) and

Evsey Domar (7) to analyze business cycles originally but later was used to

explain an economy's growth rate through savings and capital productivity.

Output, Y, is a function of capital stock, K, Y F(K), and the marginal

dY
productivity, dX = c=. The model postulates that the outp8t growth rate is given

by

1 dY
= sc−δ ,
Y dX

where s is the saving rate, and δ the capital depreciation rate. The straight

forward solution,

(x−δ)
Y ( t )=Y 0 e

Clearly demonstrates that increasing investment through savings and

productivity boosts economic growth bit does not take into account input and

population size

2.2 Samuelson

In his 1941 Paul Samuelson (8) paper employed simple differential equations to

investigate the stability of equilibrium for several demand-supply scenarios.

5
The simplest stability analysis was carried out under the Walrasian and

Marshallian assumptions. In the former force increases (decrease) if excess

demand is positive (negative), whereas in the latter quantity increases

(decreases) if excess demand Price is positive (negative). Excess demand is the

difference between the quantity that buyers are willing to buy and the quantity

that suppliers are willing to supply at the same price. Excess demand price is the

difference between the price that buyers are willing to pay for a given quantity

and the price required by the suppliers.

Let D ( p , α ) and S ( p) denote the demand and the supply functions of price, p

respectively withα a shift parameter representing "taste" . At equilibrium, price,

p*, and quantity, q*, are given by

q∗¿ D ( p∗, α )=s ( pα )

δD δD
¿ 0, ¿ 0.
δα δp

it is the task of comparative statics to show the determination of the equilibrium

values of price and quantity and their sensitivity on the "taste" parameter, a. The

dynamic formulation of the Walrasian assumption is

dp
=f ( D ( p )−S ( p ) ) , f ( 0 )=0 , f ( 0 ) >0
dt

Retaining the first. Order term in a Taylor series expansion near the equilibrium,

p*, we obtain the following linear differential equation.

6
 dp
dt
=α 0 − (
dD dS
dp dp
p∗¿ )
With solution for an initial price, p0

dD dS
−
αot dp dp( ) ¿
p ( t ) =p∗+( p∗− p 0) e p

The equilibrium is stable if ( dDdp ) <( dSdp )

p, p∗¿ ¿
. Price must rise when demand

increases.

The dynamic formulation of the Marshallian assumption is

Neglecting high order terms and using the trivial elementary calculus result,

dp 1 dp 1
= =
dq dD dq dD we obtain
dp , dp ,

[( )]
1 1 ¿
q ( t )=q∗+ ( q∗−q 0 ) exp b 0 t − q
dD dD
dp , dp ,

( )
1
The equilibrium is stable if dD , Quantity supplied must rise when
( )
1
dp , q∗¿<
dD
¿
dp, q∗¿¿

demamd increase s, while the change in price is dependent upon the algebraic

sign of the supply curve's slope.

2.3 Solow

7
Robert Solow (9) proposed a growth equation incorporating production, capital

Growth in the labour force absent from the Harrod-Domar model.

i. Production function: = F (K, L), the quantity of goods by K units of Capital

and L units of labour at time t. In a close economy where all output is invested or

consumed.

Y ( t )=C ( t )+ I ( t ) ,

Where C(t) are the consumption and investment functions respectively. An

important assumption of the model are the Inada conditions [10]

2 2
dF dF d F d F
>O , > 2 <O , 2 <O
dK dL dK dL

In the limits.

❑ ❑ ❑ ❑
dF dF dF dF
lim ∞ , lim ∞ , lim =0 , lim =0 ,
k→ o dK L→ o dL k → ∞ dK L →∞ dL

The Inada conditions ensure that F is strictly concave with slope decreasing from

infinity to zero.

The function F is linearly homogeneous of degree 1 in K and L (in economic

térms this is known as constant returns to scale, increasing capital and Labour by

a certain amount, results in a proportional rise of production) if

Y =F ( αK , αL )=αF ( K , L ) , ∀ α >O

8
 1 Y K
In particular, choosing α = L and set y L , k= L, representing the outpit and

capital per worker respectively

Y
L,
= y =F
K
L, (
, 1 =f (k ) )
The production function is expressed in terms of a unit of labour and the capital

to labour ratio. The assumption of constant returns to scale allows the simplified

function, f (k )

ii. Growths of Capital in Economy: The growth of the capital stock, K, is

equivalent to growth in investment, I, which is used to increase capital subject to

depreciation. Depreciation of capital stock will be accounted for so that I is

essentially.

Investment = rate of change + capital depreciation rate

or

dK
I ( t )= +δK (t)
dt

Where δ is the constant capital depreciation rate

C I
c (t)= , i ( t )=
T L

y ( t ) =c ( t ) +i (t )=c ( t ) +
I dK
L dt
dk
(
+δk=c ( t )+ + δ+
dt
I dK
L dt
k )
Letting c (t ) and i(t) denote the consumption and investment per labour unit

9
iii. Growth of Labour Force with full employment: The assumption in the

labour market is that the labour supply is equivalent to the population. There is

no unemployment and the growth of labour as function of time follows an

exponential growth pattern.

nt
L=Lo e

The fundamental differential equation of economic growth is then

dK
=sf ( k )− ( δ+n ) k −c (t )
dt

The differential equations and production functions outlined in three

assumptions are the fundamental elements for Solow's basic differential

equation.

In Solow's paper, a constant fraction of income is allocated to savings, in

particular, ¿ y ( t ) −c ( t )=f ( k )− (1−s ) f ( k )=sf ( k ) , so that

dk
=sf ( k )− ( δ+n ) k
dt

The equilibrium solution to the basic differential equation to found from, sf(k) =

(δ +n)k. A well-known function is the Cobb-Douglas production function,

K dY
Y(K,L) = α K β L1−β , O< β <1 ,is where β is the elasticity of output, Y dk , with

respect to capital. The use of Cobb-Douglas production function is justified

because its exhibits constant returns to scale: if capital and labour are both

increased by the same Factor, γ >1 output will be increased by exactly the same

10
 dY dY
proportion, Y ( K , L ) =γ (αK β L1−β )Also the marginal product, dK dL diminishes as

2 2
d Y d Y
either K or L increases since ¿0 <0.
dk dk

Introduce ( k )=α ¿ , so the differential equation becomes

dk
= sα k β −(δ+ n)k
dt

A multiplication factor in the form of technological progress, ( t )= A 0 e nt can be

K (t)
introduced in the production function, so that, Y (t )αK ¿and k (t) A(t)L(t ) leading

to

dk β
=sa k −(δ+ n+ g)k
dt

The first order nonlinear differential equation of has solution

k ( t )=¿

This solution includes the solution to the labour Growth only model, n = 0. The

steady state is

( )
1 1
¿ 1−β sα
y =α 1− β
δ +n+ g

dk β
Differential of dt =sa k −(δ+ n+ g)k With respect to k at k* gives , the

equilibrium is stable. The steady state level of per capita income is

11
 1
1
( s
)
1− β
y∗¿ ❑
a
1−0
δ +n+ g

a constant, since s,δ ,n , g are all constant

(A L e )=a K ( A L e ) t . The output per unit growth, 1 dY

g g
( +g)t ( + g)t
Y ( t )=a K
β
0 0
1− β β
0 0
1−β
Y dt
,

g
converges to 1−β + n

The Solow's residual is the part of growth unexplained by changes in capital and

labour. For Y (t )aK ( t ) β ¿

dY
=aβK ¿
dt

The growth rate per unit output is

1 dY β dY 1 dL 1 dA
= + (1−β ) +(1−β )
Y dt K dt L dt A dt

1 dY β dY β dY 1 dY
Solow residual = Y dt −[ K dt + K dt +(1−β) L dt ]

A positive Solow's residual

Would indicate a faster output growth than that of capital and Labour.

12
2.4 Phelps

Phelps [11] used the neoclassical Growth model to address the consumption per

unit of Labour at equilibrium in the so-called "golden rule". At equilibrium with

Labour force growth rate, n, only the consumption per unit of labour is

c ( t ) =f ( k )−nk

For a maximum consumption per unit of labour

dc df
= −n=o
dk dk

2
d fY
Since 2 ¿ 0 0, the turning point is a maximum given by n. The "golden rule"
dx

concludes that the marginal output per worker must equal the growth rate of the

labour force at maximum per capita consumption.

2.5 RICK

The Ramsey-Cass-Koopmans model, or RCK model, is a neoclassical model of

economic growth which differs from Solow's model in its inclusion of

consumption, based primarily on the work of Ramey [12], with later significant

extension by Cass [13] and Koopmans[14]

dk
=f ( k )−( δ +n ) k −c (t)
dt

A steady state is when f ( k )−( δ+n ) k −c (t)

13
There is a second equation of the RCK model, the social planner's problem of

maximizing a social welfare function expressed by the integral

∞ ∞

∫ e L (t ) u ( c )( t ) dt=¿∫ e ¿ ¿
−α ¿¿

0 0

∞
u∗¿ max ❑∫ e ¿
¿¿

c(t) 0

Subject to

dk
=f ( k )−( δ +n ) k −c (t)
dt

k o=k (0)

The Hamiltoniam is

(0−1)t
H ( c )=e ¿

Where γ is the costate variable (Lagrange multiplier). From

dH (n− p)t du
=e −γ =0 ,
dc dc

(n−p )t du
γ =e
dc

Also for the costate variable

dλ −dH
dt
=
dk
=− λ
df
dk [
−( δ + n ) ,
]
And

14
 2
d u
2
dλ dt dc
=( n− p ) λ+ λ
dt du dt
dc

Hence

2
d u
2
dt dc −df
( n−p ) λ+ = + ( δ +n ) ,
du dt dk
dc

du
dc dc dc df
whence dt = d 2 u dt − dk −( δ+ ρ ) [ ]
dt 2

This is a nonlinear differential equation that describes the optimal evolution of

consumption, known as the Keynes-Ramsey rule. Along with the differential

dk
equation, dt =f ( k )−( δ +n ) k −c (t ) , form the RCK dynamical system which does not

admit an analytical solution. At equilibrium,

( dkdf ) k∗¿=δ + ρ¿

c∗¿ f ¿

The Jacobian matrix at equilibrium,

[ ]
ρ−n
du
−
( )
2
dc d f
J= 2 2
d u dc
dc 2

15
Has eigenvalues real and opposite in sign as its determinant is dt ( )
−dk df
dk k∗¿< 0 ¿¿
are

both concave), therefore the equilibrium is a saddle point.

2.6 Romer

The growth in the Solow model is exogenous, the steady state depends on the

exogenous parameters, g, which are due to outside trends. In the absence of

A(t)L(t) growth cannot be maintained. The marginal product of capital per

dY
labour, dt = αβA ¿

In countries with lower capital per labour, the marginal product of capital should

be higher which is not the case. The disparity could be attributed to the different

g values in A (t), which is treated as an exogenously given parameter in the

Solow model, so an explanation is lacking.

Romer [15] proposed a mathematical theory of endogenous growth based on the

following three assumptions:

i. The production function, Y= F (K, A, L) offer increasing returns to scale that

is F( λK , λA , λL ¿> λF (K , A , L)

dK
ii. The change in capital is identical to Solow's model, dt = sY −δK , where s is

the fraction in savings, δ is the exogenous capital depreciation raye. Labour, L,

dL
is also exogenously, dt = nL and is comprises labour involved in research

16
technology, L. and labour involved in the production of the final goods,
LY ,=L A LY .

dA
iii. Technology is exogenous and involves in time dt = γ L0A A φ , 0<θ <1 , φ<1

As is evident from the three assumptions, Romer's growth model consists of

three sectors: the research sector if ideas, the intermediate goods sector which

implements the ideas of the research sector and the final goods sector which

produces the final output.

Let g A be the technology growth rate, taken to be constant along the stable path,

1 dA
gA= =γ L0A A φ−1 ,
A dt

dg A dL dA
=γθ L0Aθ−1 , A A φ−1 + ¿ ¿) L0A Aφ−2 =0
dt dt dt

1 d LA 1 dA
θ +(φ−1) = 0,
L A dt A dt

θn+(φ−1)g A

θn
gA=
1−φ

In Romer's model, the output production function is given by

( )
1− β
β LY
y=k
L

and the capital dynamics is

( )
1− β
dk β LY
= sk =¿(n + g A + δ )k
dt L

17
The respective stable equilibria are

( )
¿ LY s
1
k= 1−0
L n+ g A + δ

( )
¿ LY s
1
y= 1−0
L n+ g A + δ

The labour involved in the production of the final goods, LY is determined in

Romer [15] by maximizing the net profit for the final goods sector and

LY
obtaining the closed form expression for, ¿¿ Where r is the interest raye, and
L

all parameters are exogenous except for gA which is derived endogenously.

A nice accessible exposition of both Solow's and Romer's growth models is

Chu[16]. Jones [17]. argued that the predicted scale effects of Romer's theory of

growth is inconsistent with time series evidence from industrialized economies

and that long-term growth depends on exogenous parameters including the rate

of population growth.

2.7 Mankiw, Romer and Weil

dY
Mankiw, Romer and Weil [18] argued that the marginal product of capital, dk ,

is lower in poorer countries is due to their deficiency in human capital. Human

capital is the accumulation of knowledge and skills achieved through training

and education, which are essential ingredients in adding economic value. The

production function is the Cobb-Douglas type

18
 α β
Y ( t )=H ( t ) K ( t ) ¿

( ) ( )( )
❑ α β
y (t) y (t) y (t)
y (t)= = =hα k β
A ( t ) L(t) A ( t ) L(t ) A ( t ) L(t)

where H (t) is the human capital stock which depreciates at the same rate, δ , as K

(t). As in Solow's model, a fraction of the output, sY (t), saved but in this model,

it is split between human and capital stock, s=s H + sk . The evolution of the

economy is determined by

dk
= s g h α k β −(n+ g +δ) k
dt

dh
= s g h α k β −( n+ g+ δ ) h
dt

The equilibrium is

( )
1
¿ n+ g+δ
k= 0 −1− β
ω+ β−1
sks
H

( )
1
¿ n+g +δ
h= 0−1− β
ω+ β−1
sks
H

In the steady state,

y∗¿ ( n+ g+δ )

k
x 1=
Introduce the transformation, k∗¿ , x 2=
h
¿
, so that the equilibrium shifts
h∗¿ ¿

to (1,1).Then

19
 dx 1
= ( n+ g+ δ ) ( x 1β x α2 −x 1 )
dt

dx 2
= ( n+ g+ δ ) ( x 1β x α2 −x 2 )
dt

For small deviation,ξ 1 ξ2 from the equilibrium the linear system

dξ 1
= ( n+ g+ δ ) ( β−1 ) (ξ 1+ α ξ 2)
dt

dξ 2
= ( n+ g+ δ ) ¿
dt

The eigenvalues of the Jacobian matrix,

( n+ g+ δ ) β −1 α
β α −1 ¿

are given by the roots of the quadratic

2
λ + (2−α −β ) λ+ ( 1−α− β ) =0

From the production function, 1−α− β> 0 . Since the sum of the eigenvalues is,

α + β−2<0 , and the product is 1−α− β> 0 bitj rooys have negative real parts and

the equilibrium point is stable.

2.8 Kaldor

Kaldor [19] presented a model if the trade cycle involving non-linear investment

and saving functions that shift over time in response to capital accumulation or

decumulation so that the system moves from stable equilibrium to unstable

20
equilibrium again. In Kaldor model investment, I, and savings, S, functions are

non-linear with respect to the level of activity, X, measured in terms of

employment.

Kaldor used a differential equation system with general non-linear forms.

Net investment, I, and savings, S, are functions of national income, Y, and

capital stock, K:

I =I ( Y , K ) ,

S=S (Y , K )

dI dI dS dS
>0, <0, >0, <0,
dY dK dY dK

dI dS
¿
dY dY

Also growth

dK
=I (Y , K )
dt

Since income will rise if investment is greater than savings, the dynamics of

national income is captured by the differential equation

dK
=αI ( Y , K )−S(Y , K )¿ , α >0
dt

21
The necessary and sufficient assumptions for the generation of a perpetual

cylical movement are:

i. For normal income levels,

dl dS
>
dY dY

ii. For extreme income levels, either how or high,

dl dS
<
dY dY

dK
iii. At equilibrium, where dt =0 Income levels are normal.

2.9 Philips

National governments design their expenditure policies to steer the national

economy towards a desired income. The theory of feedback control or

servomechanisms provides the mathematical methodology of correcting

deviations of the controlled variables from their values. Feedback policies

applied to economic stability were implemented by Philips [20].

If Y is national income and D is the aggregate demand then for some adjustment

coefficient,α >0 ,

dY
=α (Dα −Y )
dt

22
A similar differential equation holds for the actual, D g and target government
¿
demand D g , with b> 0 , namely

dD g ¿
=α ( D α −D g)
dt

Aggregate and government demand are related by

Dα =mY + D g ,

Where m is the private sector's marginal propensity to spend Eliminate D g to

obtain

dY
=α ( m−1 ) Y + α Dg
dt

Differential the above to obtain

2
d Y dY dY dY
+ ab ( D α −D g )=α ( m−1 )
¿ ¿
2
=α ( m−1 ) + ad D α + ab ( m−1 ) Y −b
dt dt dt dt

Or

2
d Y dY
+ [ b+ a ( 1−m ) ]
¿
2
+ab ( m−1 ) Y −ab D α =0
dt dt

Phillips model is thus described by the linear second-order differential equation

where Y is the target variables and D is the control variable, investigated three

types of feedback policy.

¿
i. proportional, D α =−kpY , where kp >0. This policy does not prevent income

reduction and induces oscillations.

23
 ¿ dY
ii. Derivative, D α =−k D dt This policy does not prevent income reduction

but aviids oscillations.

¿
iii. iii. Integral. D αThis policy prevents income reduction but can induce

unstsble movement.

2.10 Kalecki

Kalecki [21] was the first economist to investigated the relationship between

production lags and endogenous business cycle by considering a closed

economic system over a short period of time without trend. A(t) is the gross

capital accumulation (unconsumed goods). There is a "gestation period", θ for

any investment I(t).

Deliveries L(t) are equal to investment orders, I (t−θ) at time, t−θ .

L ( t ) =I (t−θ)

Any orders placed during the "gestation period" , (t−θ , t) remain unfulfilled, A(t)

is equal to the average of investment orders I(t) allocated during the period

( t−θ , t ) .

t
1
A ( t )= ∫ I (τ)dτ
θ t −θ

If K (t) is the capital stock, and U its physical depreciation

dK
=L ( t ) −U=I ( t−θ )−U
dt

24
The rate of change in investment is for some constants,

dI dA dK m
=m −n = [ I ( t ) −I ( t−θ ) ] −n[I ( t−θ ) −U ]
dt dt dt θ

Denoting the deviation of I(t) from the constant demand for restoration of the

depreciated industrial equipment U by J ( t )=I ( t )−U , . and differentiating J ( t )

dJ m
= [J ( t )−J ( t−θ )−nJ (t−θ)]
dt θ

or

dJ
θ + ( nθ+ m ) ( t−θ ) −mJ ( t ) =0
dt

During the interval t ∈[−θ , 0] Kalecki assumed that J (t )=0. A standard way to

solve this differential equation with delay is to assume a solution of the form,

De with D and α (where α is a complex number), to be determined. The general

at

solution of the differential equation for some constant, c 1 ¿ c2, is

bt
J ( t )=e [c 1 cos ( ωt )+ c 2 sin ⁡(ωt )]

The sign of the real parameter, b, classifies the behavior of the model as

explosive for b> 0 , , cyclical for b=0, and damped for b< 0.

2.11 A Solow model with lags

25
Zaks [22] considered a version of the Solow model with delay. Capital can be

used periods later, so at time t, the capital to be pit into productive use is k (t−k )

if f (k ) the production function, s ∈(0 , 1)is the Constant savings rate and δ ∈[0 , 1]

is the constant capital depreciation rate, Zak's model is

dk
=sf ( k ) t−τ ¿ ¿−δk(t−τ )
dt

At equilibrium,

¿ ¿
sf (k =δk )

Deviation of the form, e τ , ,from equilibrium are governed by

dk
dt
dk
(
= s −δ e−τ ,
dt )
λ= s( dk
dt )
−δ e−λτ =0

With characteristics equation

λ= s( dk
dt )
−δ e−λτ =0

In many cases depending on the initial conditions, the root of the characteristics

equation have real parts with opposite signs, indicating the presence of a saddle

point unlike Solow's stable model. The model exhibits endogenous cycle when

the roots are purely imaginary.

2.12 Goodwin

26
Goodwin [23] presented a non-linear model of nonlinear business cycles with

time lags between decisions to invest and the corresponding outlays. Changes at

time t, in income, y(t), induce investment outlays, O,(t +θ), at a later time, t+ θ

Therefore

Oi (t+ θ)=φ ( dkdt )=φ ( y)

Hence the nonlinear delay differential equation modelling the evolution of

oncome is

dy (t+θ)
e + (1−α ) y ( t+ θ )=O ( t )+ φ ( y ) ,
dt

Where O(t) is autonomous investment outlay and ∈ , α are constants. The

dφ ( y )
derivative, , measures the rate of growth in investment with relative to
dy

the income growth, termed as acceleration coefficient. Expanding the two

leading terms in Taylor series and neglecting higher order terms, Goodwin

obtained non-linear delay differential equation

2
d z (
∈θ 2
+ 1−α ) ¿
dt

Goodwin assumed that O(t) is constant, O(t)=O¿. and introduced a new variable

¿
O
z (t )= y ( t )−
1−α

27
 ¿
O
Where 1−α is the income at equilibrium. The transformed differential equation

is then

2
d z ( dz
∈θ 2
+ 1−α ) θ+ε ¿ −φ(z )+(1−α ) z=0
dt dt

The asymptotic behavior of the transformed equilibrium, z, is determined by the

eigenvalue solutions of the. Characteristics equation

∈θ λ + [ ( 1−α ) θ +ϵ−φ ( 0 ) ] λ+ ( 1−α )=0 ,

2

With characteristics roots,

λ 1, 2=φ ( 0 )−[ ( 1−α ) θ+ϵ ]± √ ¿ ¿ ¿

Since

1−α
λ 1 λ 2= >0
ϵθ

And

λ 1 + λ 2=φ ( 0 )−¿ ¿

can be either positive or negative, both eigenvalues have positive or negative real

parts. So if φ ( 0 )< ( 1−α ) θ +ϵ the deviations from equilibrium are damped

oscillatory motions, but if φ ( 0 )> ( 1−α ) θ +ϵ the system is unstable is unstable and

drifts away from the locally linearized region of stability.

2.13 a brief literature survey of current research

28
We close this chapter by providing a very brief snapshot of the current state of

the art in theories of economic growth. Most of the very recent works citied are

predominantly mathematical on nature. There is an enormous literature, not

touched upon here, which employs Econometrics methods, like for instance

panel data regression to estimate economic growth based on explanatory

variables such as income, investment, policy indicators, education and others

over several decades.

In a short article Zhao [24] discusses how technology was Integrated into

economic growth by Romer.

Boyko et [25] use least squares linear regression yo determine the values of the

coefficients at which the production functions of Cobb-Douglas in Solow'

growth model provide the best fit for available statistical data. Borges at al. [26]

examine the dynamic of Solow's economic growth model assuming that the

labour force growth rate function is a solution of a delay differential equation

thereby avoiding the use of exponential growth, L ( t ) =Loent often criticized as a

rather unrealistic choice. Their approach id motivated by the fact that there are

delays in entering and retiring an individual from then labour force, relative to

their birth date.

Zhang et al. [27] base their analysis of how the redistribution of emission quotas

would impact short-run equilibrium in a specific market of interest and long-run

29
growth on the Solow growth model with endogenous dynamics and exogenous

technological shocks

Zhang [28] develops an endogenous growth model based on modifications of

both Solow's model based on modifications of both Solow's model by

introducing endogenous knowledge and Romer's by allowing knowledge to be

gained from learning as well from research.

The paper

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31