What if labour force grows?

Accumulation eqn now

Analysis in growth rates

Can illustrate above with graph of gk and k

Rise in savings rate (s0 to s1)

Solow’s surprise*

  • Solow’s model states that investment in capital cannot drive long run growth in GDP per worker
  • Need technological change (growth in A) to avoid diminishing returns to capital
  • Easterly (2001) argues that “capital fundamentalism” view widely held in World Bank/IMF from 60s to 90s, despite lessons of Solow model
  • Policy lesson: don’t advise poor countries to invest without due regard for technology and incentives

Golden rule

  • The ‘golden rule’ is the ‘optimal’ saving rate (sG) that maximises consumption per head.
  • Assume A is constant, but population growth is n.
  • Can show that this occurs where the marginal product of capital equals (d + n)

Graphically find the maximal distance between two lines

… over saving

Role of Savings empirical 1

  • What we said so far is that the more a country saves, the more it invests; the more it invests, the higher its capital-output ratio; the higher its capital-output ratio, the higher its output-labour ratio.
  • Output-labour ratio is p.c. Income, hence countries with high savings and investment should show high p.c. Income. Is this true?


Essay writing tips: 論文代寫