During this transition phase to the new steadystate

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Unformatted text preview: ratio, (k/l)0*, saving, now given by the new saving function (s/l)1, provides more resources than needed for replacement investment. As a consequence, net investment is positive, the capital‐ labour grows and the economy moves towards its new steady‐state (point b). During this transition phase to the new steady‐state, per capita income also grows (moving from (y/l)0* to (y/l)1*). Note that once at the new steady‐state, without further growth in total factor productivity, growth will once again stop. It therefore follows that should there be a continual process of productivity growth, the analysis of Figure 1 will be replicated through time and the result will be long‐run growth in per capita income and in the capital‐labour ratio. Otherwise, a steady‐state is reached and growth in per capita income stops. I agree with the statement. Part (b) y/l y/l=Af(k/l) s/l ri/l c b a k/l There are three points that satisfy the condition for a steady‐state as outlined in part (a); points a, b and c. To the left of a, saving exceeds replacement investment, net investment is positive, and the capital‐labour ratio grows; the economy moves to the steady‐state a. Between a and b, replacement investment exceeds saving, net investment is negative and the capital‐labour ratio falls; the economy moves to the steady‐state a. Between b and c, saving exceeds replacement investment, net investment is positive, and the capital‐labour ratio grows; the economy m...
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