LR Growth Model II

Savings vs.
Depreciation and Population Growth
Population Growth
Capital accumulation alone does not explain sustained economic growth.
need population growth & technological progress.
Assume population grows at constant rate, n.
now three forces acting on capital per worker
Dk = i (d+n)k = sf(k) (d+n)k = Saving Breakeven Investment
(d+n)k is termed the break-even investment level:
Investment needed for capital per worker constant.
In steady state, positive effect of savings just balances the negative effects of
depreciation and population growth on capital per worker.

Chapter 8 - Economic Growth II 2

Output, Investment & Saving
Investment
and
Break-Even (d+n)k
Investment

sf(k)

k* k
Effects of Population Growth
Adding population growth enriches Solow model:
In steady state,
1. output and capital per worker fixed BUT
2. total output and total capital grow at rate of population growth.
Helps to explain differences in standards of living across countries.
High population growth leads to:
1. Lower capital per worker &
2. Lower standards of living.

Chapter 8 - Economic Growth II 4

Increase in Population Growth
Investment
and
Break-Even (d+n2 )k
Investment
1 (d+n1 )k

sf(k)

k2* k1* k