What is the golden rule level of capital?

The Golden Rule level of capital represents the level that maximizes consumption in the steady state. Suppose, for example, that there is no population growth or technological change.

What is Golden Rule in macroeconomics?

In economics, the Golden Rule savings rate is the rate of savings which maximizes steady state level of the growth of consumption, as for example in the Solow–Swan model.

What is the marginal product of capital in the initial steady state?

At the Golden Rule steady state, the marginal product of capital is 7 percent, whereas it is 12 percent in the initial steady state. Hence, from the initial steady state we need to increase k to achieve the Golden Rule steady state.

Why is capital per worker increasing in the savings rate?

As we have seen, the equilibrium value of capital per effective worker increases with the saving ratio. In steady state, the per capita income path is higher for a greater savings ratio. A greater capital stock requires more break-even investment—i.e. investment just to keep capital per effective worker constant.

What is capital per worker?

The quality of capital per worker is a measure of how much capital exists in an economy and how good that capital is. Imagine, for example, the difference between an economy where bakers are using wooden spoons to mix their cakes and one in which they use electric mixers.

How do you solve a capital accumulation equation?

Present capital stock (represented by K), future capital stock (represented by K’), the rate of capital depreciation (represented by d), and level of capital investment (represented by I) are linked through the capital accumulation equation K’= K(1-d) + I.

How do you calculate MPK?

MPK can be calculated as the change in total production divided by the change in capital assuming that no other adjustments to production have been made, including changes in labor.

Where is MPK in Solow model?

MPK – δ = n + g. Under the Golden Rule, the net marginal product of capital is equal to the growth rate of total output. In equilibrium, the interest rate (the return on saving) is equal to the net marginal product of capital after depreciation.

What is capital Labour ratio?

Capital to Labour ratio measures the ratio of capital employed to labour employed. Typically, over time, firms tend to have a higher capital-labour ratio as they seek to gain productivity improvements from investment in capital and automating the production process.

What is the marginal product of capital equal to?

Thus, the marginal product of capital is the difference between the amount of output produced with K + 1 units of capital and that produced with only K units of capital.

Is long-run growth possible in Solow model?

The Solow growth model focuses on long-run economic growth. A key component of economic growth is saving and investment. An increase in saving and investment raises the capital stock and thus raises the full-employment national income and product.

When does the Golden Rule of capital accumulation apply?

If the actual saving rate exceeds the rate (s g) shown in Fig. 4.8, the steady-state capital stock will be excessive. In contrast, if the saving rate is lower than s g the steady-state capital stock will be inadequate. In either case, steady-state consumption level will be less than it is at the Golden Rule steady state.

Why is saving important in the Golden Rule?

Importance of Saving in the Context of the Golden Rule. The Solow model shows at least one thing very clearly — how an economy’s rate of saving and the level (volume) of investment conjointly determine its steady-state levels of capital and income. But higher saving rate is not always a good thing.

How to determine if economy is at Golden Rule Level?

In order to ascertain whether the economy is at the Golden Rule level, we have to determine first the steady-state consumption per worker. Then we can find out which steady state provides the maximum consumption per worker.

How is the Golden Rule related to depreciation?

Since at the Golden Rule level of capital (k*) the slope of both the production function (i.e., the MPK) and the depreciation line (i.e., δ) are equal, we have MPK = δ … (18) Equation (18), which describes the Golden Rule, simply implies that at k*, the MPK is equal to the rate of depreciation.