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In: Economics

How calculate the steady-state level of income per capita?

How calculate the steady-state level of income per capita?

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Expert Solution

Solow Growth Model

In the Solow growth model, the increase in the population growth rate influences the growth rate of aggregate output. But it does not incfluence the growth rate of per capita output.  

On the other hand an increase in the population growth rate lowers the steady state level of per capita output.  

In the steady state, growth rate of total income is determined by the following factors.

i. the population growth rate

ii.the growth rate of total income

If higher the population growth rate (n), higher the growth rate of total income

Then the steady state growth,  rate of total income is n + g.

In the steady state, if capital per worker remains constant, output per worker will also remains constant. Under such situations, the growth rate of steady state output per worker is 0.  

The steady state level of capital is the total amount of capital per worker, remains stable for a period of time - with no accumulation or depletion of his capital. It usually happens when investment in the per capita capital is same as the depreciation of capital stock.

Rahul Sunny answered 1 year ago
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