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?
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