Answer to Question #161502 in Microeconomics for pooja

Question

derive the conditions for steady state growth in the solow model?

Answer 1

In state growth all variables such as output, population, capital stock, saving, investment and technical progress grow at constant exponential rate.

Solow modal demonstrates steady growth path as determined by an expending labour force and technical progress.

In solow modal the equilibrium growth path is a steady state in which "level variables" such as K and Y grow at constant rate and the ratio among key variables are stable.

Lets continue our exploration of the Solow

Of the solow growth modal-

1. Diminishing return

Depreciation decrease constant as the capital stock increases from savings and investments.

2. We can be save and invest in new stock.

3. Suppose we invest a constant fraction of our ouput. Investment =0.3*Y.

4. Since investment is just a constant fraction of output - we get less output and also less investment.

5. Thats the iron logic of diminishing returns once again as we add more and more unit of capital. Other hand less output and less investment.

6. Investment and depression on the same graph.

As the capital stock grows each new units of capital creates and equal amount of depreciation.

7. When investment is greater than depreciation we are adding more units of capital than depreciation.

8. Investment and depreciation, they are on a crash course to intersect. The steady state is the key to understanding the solow modal.

9. At the steady state, an investment is equal to depreciation. That means all investment is being used.

10. Just to repair and replace the existing capital stock. All investment goes to repair and replace existing capital.

11. So the capital stock is not growing, nothing is growing.

12. You can observe in the diagram depreciation is greater than investment. Some of the capital stocks needs repair.

After all the steady growth rate of total income is n+g the higher the population growth rate and is, the higher of growth rate of total income is. Income per hour however, grow at rate g is steady state and, thus, is not effected by population.