Prove each of the following statements about the steady state of the Solow model with population...

Prove each of the following statements about the steady state of the Solow model with population growth and technological progress.
a. The capital–output ratio is constant.
b. Capital and labor each earn a constant share of an economy’s income. [Hint: Recall the definition MPK= f(k + 1) - f(k).]

c. Total capital income and total labor income both grow at the rate of population growth plus the rate of technological progress, n + g.
d. The real rental price of capital is constant, and the real wage grows at the rate of technological progressg.

Solutions

Expert Solution

This equation says that the growth rate of the real wage plus the growth rate of the labor force equals the growth rate of total labor income. We know that the labor force grows at rate n, and from part (c) we know that total labor income grows at rate n + g. We therefore conclude that the real wage grows at rate g.

Rahul Sunny answered 1 year ago

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