12. Technological progress and growth

Question 1

Dynamics of capital and output

Answer 1

Balanced growth - the steady state in the economy in which output, capital and effective labor all grow at the same rate (gA+gN)

On the balanced growth path (=steady state; long run)
1. Capital per effective worker and output per effective worker are constant
2. Capital per worker and output per worker are growing at the rate of technological progress, gA
3. Labor is growing at the rate of population growth gN
Capital and output are growing at the rate equal to the sum of population growth and the rate of technological progress, (gA+gN)

Question 2

The effects of the saving rate

Answer 2

An increase in the saving rate leads to an increase in the steady-state levels of output per effective worker and capital per effective worker
The increase in the saving rate leads to higher growth until the economy reaches its new, higher, balanced growth path