# solow model

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## solow model

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## Re: solow model

 When the propensity to save increases, nothing changes physically in the economy except for the fact that consumption goes down and savings increases, shifting the investment curve upwards. However, all this while, the depreciation curve does not change (this is affected only by exogenous factors like depreciation rate, population growth etc). So the only change we observe is the investment curve intersecting the depreciation curve at a higher k*. Note that it won't go back to the original level because at the new level, depreciation = investment (ie steady state). Hence the new steady state level is higher than the old one. If you plot the investment and depreciation curves on a graph this will be clear.
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## Re: solow model

 steady state LEVEL of per capita capital stock does increase true..but as far as i know steady state GROWTH RATE does not change it still equals rate of population growth at the new steady state....
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## Re: solow model

 Ah apologies for the oversight there. Yes you were correct in what you had mentioned in the original post. It does look like they're not too interested with the long run, and are just looking at the short run period, where the increase in capital stock causes output to expand faster in the short run
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## Re: solow model

 Hey any idea about the following question? Suppose that the production function in an economy is given by Y = (K^1/2)(N^1/2), and both the saving rate (s) and the depreciation rate (d) are equal to 0.10 and labor force growth rate is 0.02. What is the growth rate of wage rate at steady state? The answer is given as 0. So does that mean growth of wages in steady state is 0? Should it not be 0.02 i.e. the growth rate of labour supply?
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## Re: solow model

 @Chinni18 Might be the answer is wrong. If growth rate of wage in steady state is zero, how can it sustain the population growth? It is not possible i think. Answer might be wrong only
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## Re: solow model

 But even if the growth rate of wage is zero it might make sense, because that's what a steady state implies, isn't it? I'm pretty confused. Have not come across anything concerning wages in the neoclassical growth model, only savings, capital, consumption etc.
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## Re: solow model

 hmm.. yes Chinni even I have not come across something like this before... see either wages will be constant ie zero growth rate or they will grow @ 0.02 with labour supply... i have a feeling its the latter. Someone please clarify!
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## Re: solow model

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## Re: solow model

 In reply to this post by Chinni18 As per this handout, wage grows @ k dot - and at steady state, k dot =0 so thats why the answer is zero.