What are state variables? The basic idea of solving dynamic models that contain a differential equation is to first write the model so that along a balanced growth path, some state variable is constant. In Chapter 2, we used y/A and k/A as state variables. In this chapter, we used y/Ah and k/Ah. Recall, however, that h is a constant. This reasoning suggests that one should be able to solve the model using y/A and k/A as the state variables. Do this. That is, solve the growth model in equations (3.1) to (3.4) to get the solution in equation (3.8)

using y/A and k/A as state variables.