Model evaluation of Solow growth model

In the Solo model, higher savings lead to faster economic growth, but this is only temporary. The increase of savings rate will accelerate economic growth until it reaches a new stable state. If the economy maintains a high savings rate, it will also maintain a large amount of capital stock and high output level, but it is impossible to maintain high economic growth forever.

From this point of view, the savings rate is the key factor of a country's poverty and wealth (in fact, this is only one of them).

From the perspective of economic welfare, what is the optimal level of capital stock, that is, what is the optimal savings rate?

Huang Jinlv's capital level-the stable level of per capita capital stock K that maximizes consumption.

Huang Jinlv's economy will not stabilize automatically, and it needs a specific savings rate to support it.

Huang Jinlv's transition to a steady state:

Since the capital stock is greater than the stable state of Huang Jinlv, in order to achieve the stable state of Huang Jinlv and reduce the savings rate, consumption will increase immediately and investment will decrease. At first, investment and depreciation were equal. Now that the investment is less than depreciation, the economy is no longer in a stable state, and the capital stock will decrease until it reaches a new stable state. Assuming that the new stable state is Huang Jinlv level, consumption will increase, investment will decrease and output will decrease. In this process, capital stock is decreasing, output is decreasing, investment is decreasing, consumption begins to increase, and then decreases with the decrease of output, but it still increases compared with the initial state, reaching the level of consumption maximization.

Since the capital stock is less than the stable state of Huang Jinlv, in order to achieve the stable state of Huang Jinlv and increase the savings rate, consumption will be reduced and investment will be increased immediately, and the capital stock will increase until the new stable state, assuming that it is the stable state of Huang Jinlv. In this process, the capital stock will continue to increase and the output will continue to increase. After the consumption is less at first, it will increase with the increase of output, reaching the level of consumption maximization, and investment will always increase.

When deciding whether to achieve a stable state in Huang Jinlv, policy makers must consider that current consumers and future consumers are not always the same people. When Huang Jinlv reaches a stable consumption level, future generations will benefit. However, when the economy was initially lower than that of Huang Jinlv, Huang Jinlv demanded more investment, thus reducing the consumption of contemporary people. Therefore, when decision makers choose whether to accumulate national capital, they are faced with the balance of welfare between different generations.

Therefore, whether the optimal capital accumulation can be achieved depends on how we weigh the interests of contemporary and future generations.

In short, the capital stock of this economy is higher than that of Huang Jinlv. Reducing savings will increase consumption at all times and benefit every generation. If it is lower than the stable capital stock in Huang Jinlv, increasing the savings rate will improve the consumption level in the future, but it will reduce the consumption level of modern people.

Capital accumulation itself cannot explain the sustained economic growth. The high savings rate has caused temporary high growth, but the economy will eventually reach a stable state with unchanged capital and output.

In addition to the savings rate, there are two other sources of economic growth: population growth and technological progress.

Investment that can't make ends meet-the investment required to maintain the per capita capital stock for many years (depreciation rate+population growth rate) × capital stock.

Impact of population growth:

1. In the stable state of population growth, per capita capital and per capita output remain unchanged. However, because the number of workers continues to grow at the rate of N, total capital and total output must also grow at the rate of N.. Therefore, although population growth cannot explain the continuous improvement of living standards (in a stable state, the per capita output remains unchanged), it helps to explain the continuous growth of total output.

2.Solo model predicts that countries with higher population growth rate will have lower per capita GDP. Comparing different population growth rates n, the chart shows that n is higher, that is, the slope of the balance of payments curve is larger and the per capita capital stock is lower than the investment curve SF.

So the per capita output is low.

3. Steady state of Huang Jinlv, marginal product of capital-depreciation rate = population growth rate.