Question

Consider the following statement: “Devoting a larger share of national output to investment will imply a higher consumption per worker and a higher living standard.” Do you agree with this claim? Explain, using the Solow model.

Answer 1

Answer -

There will be a basic assumption that economy starts with stedy and stable level of state capital that is below the Golden rule level.

When larger share of national income ( output ) is contributed for the investments, small part of national output available for consumption purpose.When there is decrease in consumption and increase in investments ,more stock of capital will be available for production and there would be a growth of total output or productive per labour also increases simaltaneously. When additional outputs are produced by the workers,total productivity will also rise.

When we consider about the new stedy State output will grow at ( n ) rate at of growth of output per worker at zero rate.It clearly states that the new state wise productivity growth is independent of the investments.

When we considered the economy below the Golden rule level so there is increase in the higher investment rate.Therefore living standard of the people is higher because of increase in job and employment opportunities.Therefore the increase investment rate increases productivity only in the short run and not for long run.