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SOLOW’S SIMPLE GROWTH ACCOUNTING MODEL Determining how much savings should occur into order to achieve Y = C + I G + G + (X-M) Y = Total output or income or GDP I = Investment s = percentage of income saved or “savings rate” S = total national savings expressed in dollars (sY) I = sY (Investments equals national savings) K = total physical capital or capital stock (within an industry sector or an economy) L = total labor (within a given sector or within a given economy) k = capital per worker, or K/L y = output per worker, or Y/L n = labor force growth rate d = depreciation rate The higher the amount of investment (I) or savings (sY) in an economy, o the greater the productive capacity of the economy and o the greater the output that is produced. Also, o the greater the amount of capital per worker.

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Output may be expressed as either income “Y” or as a function of capital accumulation, “f(k)”: capital-to-labor ratio Savings or investments Output
Consumers can do either one of the following with their incomes: either spend it or save it. This relationship between income and the option to spend or save is represented by the following expression: (Y = Consumption spending + Saving). Let’s say that the percentage of total income that is saved (or the savings rate) is represented by little (s). We can determine the dollar value of the economy’s gross investment (I) by multiplying the savings rate (s) by total income or output (Y). This gives us the expression,

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