2. Empirical evidence of the Solow growth model. a. Does higher saving-investmen

Question

2. Empirical evidence of the Solow growth model. a. Does higher saving-investment rate predict higher economic growth and income per- capita in the Solow model? What are the empirical evidence for and against this prediction? steady-state levels of income per worker and consumption per worker? capita in the Solow model? What are the empirical evidence for and against this b. How does population growth affect the steady-state level of capital per worker, the c. Does higher population growth rate predict higher economic growth and income per- prediction?

Explanation / Answer

a)A lasting rise in the saving proportion will increase the output level permanently, however not its rate of growth. In the transition phase, (that might be for decades), the growth will be higher. However the augmented investment ultimately outcomes in an offsetting rise in the depreciation, & thus capital/ worker levels off. Saving & capital accumulation by themselves, technology being constant, can’t explain long-term economic expansion. The United States has a huge budgetary deficit, ( 5 per cent of GDP), and with the state giving more tax cuts, & more high-priced programs . Budgetary deficits lessen national savings, which wouldn’t be harmful if the rate of private saving were high, but in the United States this is low. The Solow framework warns that this strategy is likely to lessen income growth across an extended time period.

b)Population growth, by itself, lessens the steady-state rate of capital/ worker. Through the production function, this directly transforms to lessen per capita output & income. Steady-state per capita income is stable ; overall output rises at the rate of population growth

c)Solow’s framework, even without technological alteration, explains

• positive relation of rates of investment & per capita income

• negative relation of rate of population growth & per capita income .

It also aids in explaining :

• 2 to 3 decade growth wonders post period of war destruction

• rise of Asian tigers

•eventual downfall of heavy industry expansion in Soviet

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