3. So the capital stock and output are steady over time rather than growing or shrinking. Japan's high rate of private saving is offset by its high public debt. D) consumption per worker. The reason for this is that the increase in output is smaller than the increase in depreciation. For attaining any particular steady-state capital stock adequate saving must be generated. The process comes to halt only when each variable reaches its steady state level. So there are two ways of finding out the Golden Rule steady state — looking at steady- state consumption or looking the MPK, Both the methods yield the same result. The Solow model shows at least one thing very clearly — how an economy’s rate of saving and the level (volume) of investment conjointly determine its steady-state levels of capital and income. In general, this exercise shows that certain economies might be over-saving (s>α) and as a consequence k∗ >k g, others might be under-saving (s<α) and k∗

Since investment and depreciation were equal in the initial steady state, invest­ment will now fall short of depreciation. 4.9, that these policies succeed and at some point (say tIn Fig.

Population growth along with investment and depreciation affect the accumulation of capital per worker. Therefore, there is no reason to expect the golden-rule level of k∗to prevail rather than some other level of k∗. The steady-state, value of k which maximises consumption per worker is called the Golden Rule Level of Capital, a term first coined by Edmund Phelps and is denoted by k*In order to ascertain whether the economy is at the Golden Rule level, we have to determine first the steady-state consumption per worker. Here we consider two situations: (i) one in which the economy starts with more capital than in the Golden Rule steady state and (ii) one in which it starts with less capital than in the Golden Rule situation. The Solow model assumes that countries with higher population growth will have lower levels of GDP per person, therefore lower incomes, and vice versa. An increase in the saving rate cannot explain the sustained growth of Western countries since the 1950s. ���L�t���M����0F�RA9�zC���V�r��{&x In such a situation the economy attains higher consumption at all points of time after reaching the Golden Rule. The steady-state growth rate of output per worker is zero regardless of the saving rate. The golden rule level of capital is: The steady-state value of capital per worker that maximizes GDP The steady-state value of capital per worker that maximizes Investment The steady-state value of capital per worker that maximizes Consumption Thee steady-state value of capital per worker that minimizes losses. If an economy starts with a steady state with more capital than it would have in the Golden Rule steady state, the appropriate course of ac­tion for the policymakers would be to reduce the saving rate in order to reduce the stock of capital. The "golden rule" is the level at which steady-state consumption is at a maximum, given the parameters of the model. In such a situation, the production function f(k*) is steeper than the steady-state deprecia­tion line (δk*). Before publishing your Articles on this site, please read the following pages: A simple approximation of this is that the government has borrowed 100% of Since the golden rule applies only in the steady state an economy not in that state " When an economy starts with less capital than in the Golden Rule steady state, public policy can be used to raise the saving rate to reach the Golden Rule.

Thus, pushing the saving rate to higher and higher levels is not always desirable. At the Golden Rule level of capital, the production function and the line of depreciation have the same slope, this implies that consumption is at the highest possible level. Let us suppose, as shown in Fig. The Golden Rule capital stock is the level at which MPK = δ, so that the marginal product of capital equals the depreciation rate. /Filter /FlateDecode One is favourable, the other is not. >>

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