Question

Derive the condition for steady state growth in the solow model. What are its implications? In what respect is the golden rules different from steady state




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Answer 1

Answer:

$♡<em>ANSWER</em>♡$

The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

 

1)The Solow Growth Model, developed by Nobel Prize-winning economist Robert Solow, was the first neoclassical growth model and was built upon the Keynesian Harrod-Domar model. The Solow model is the basis for the modern theory of economic growth.

 2)Simplified Representation of the Solow Growth Model

3)Below is a simplified representation of the Solow Model.

 

Assumptions:

1)The population grows at a constant rate g. Therefore, current population (represented by N) and future population (represented by N’) are linked through the population growth equation N’ = N(1+g). If the current population is 100 and the growth rate of population is 2%, the future population is 102.

2)All consumers in the economy save a constant proportion, ‘s’, of their incomes and consume the rest. Therefore, consumption (represented by C) and output (represented by Y) are linked through the consumption equation C= (1+s)Y. If a consumer earns 100 units of output as income and the savings rate is 40%, then the consumer consumes 60 units and saves 40 units.

3)All firms in the economy produce output using the same production technology that takes in capital and labor as inputs. Therefore, the level of output (represented by Y), the level of capital (represented by K), and the level of labor (represented by L) are all linked through the production function equation Y = aF(K,L).

4)The Solow Growth Model assumes that the production function exhibits constant-returns-to-scale (CRS). Under such an assumption, if we double the level of capital stock and double the level of labor, we exactly double the level of output. As a result, much of the mathematical analysis of the Solow model focuses on output per worker and capital per worker instead of aggregate output and aggregate capital stock.

Answer 2

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