Question

In Robert Solow's long-term growth model What happens if the depreciation rate of the economy increases? How is that going to impact the steady-state per capita GDP, per capita capital, per capita consumption etc?

Answer 1

The long-term growth model by Rober Solow, focuses on basically two factors, i.e., savings & investment.

An increase in savings & investments, also raises the -

per capita GDP,

per capita capital and

per capita consumption within an economy.

In such situation as per the model, if the depreciation rate of the economy increases it will cause a decline in the market value of the assets by the influential factors like savings & investments, as suggested by Solow's long-term growth model.

The unfavourable fiscal/monetary policies in the adverse conditions like war, epidemic/pandemic, earthquake, cyclones, etc, hit the markets at first. The investors and producers tend to save more than to invest.

Hence, these negative economic factors causes economic depreciation in the value of the assets like - real estate, infrastructure, roads/bridges, machinery like construction and production equipments, etc,.Which thus, in the longer-run affects the growth of per capita GDP,  per capita capital and per capita consumption in an economy with lesser investment and production practices, saving more for the future.

On the contrary as per Solow' model the golden rule of capital stock and savings rate maximizes consumption. The higher the capital stock the higher is the desirable output.

With a sacrifice in the level of consumption, a higher capital stock can be sustained by devoting a larger part of output to investments.