This relation describes what happens to capital per worker If investment per

This relation describes what happens to capital per

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This relation describes what happens to capital per worker: If investment per worker exceeds depreciation per worker, the change in capital per worker is positive: capital per worker increases. If investment per worker is less than depreciation per worker, the change in capital per worker is negative: capital per worker decreases. 29 _ _ = = N K N K t t 1 Change in capital per worker from year t to year t + 1 Depreciation per worker during year t Investment per worker during year t N K t N K sf t
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| faculty of economics and business 20-12-2016 The steady state When we arrive in K*/N we are in the steady state . In other words: K*/N is the steady state level of capital per worker. 30
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| faculty of economics and business 20-12-2016 C/N in the steady state 31 K/N Y/N = f ( K/N ) Y/N sf ( K/N ) δ ( K/N ) K*/N C*/N sY*/N Y*/N N Y s N C N Y sY C I C Y t t
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| faculty of economics and business 20-12-2016 Three observations on saving 1. The saving rate has no effect on the long-run growth rate of output per worker. 2. Nonetheless, the saving rate determines the level of output per worker in the long run. Other things equal, countries with a higher saving rate will achieve higher output per worker in the long run. 3. An increase in the saving rate will lead to higher growth of output per worker for some time, but not forever. 32
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| faculty of economics and business 20-12-2016 Saving and output 33
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| faculty of economics and business 20-12-2016 Saving and consumption (1) An increase in the saving rate always leads to an increase in the level of output per worker, but not in consumption per worker . To see why, consider what happens to consumption per worker for two extreme values of the saving rate: An economy in which the saving rate is zero. An economy in which the saving rate is equal to one. 34
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| faculty of economics and business 20-12-2016 35
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| faculty of economics and business 20-12-2016 The golden rule (1) There seems to be an “optimal” saving rate ( 0 < s G < 1 ) that maximizes steady-state consumption per worker. The steady state equilibrium that maximizes consumption per worker is called the golden rule steady state 38
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| faculty of economics and business 20-12-2016 Conclusion We have shown that (increased) saving can trigger economic growth. Yet, once in the steady state, capital per worker and income per worker remain constant. In other words, there is no economic growth per worker Sustained economic growth has to come from some other source: The answer lies in the production function  the role of A (“technology”) 39
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| faculty of economics and business 20-12-2016 Happy Holidays! https :// 40
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