Growth 4

Question 1

Does an increase in saving increase consumption in the long run?

Answer 1

Not necessarily:
- When S = 1, K/N is high
- In a steady state, implication is that all output is devoted to replacing depreciation of capital
- Consumption becomes zero in the long run

Question 2

Describe the Golden Rule.

Answer 2

• Makes consumption per worker as high as possible
• If capital stock is too high output used to maintain large capital stock - consumption becomes low
• If capital stock is too low output is used to support consumption - capital too low to produce sufficient output

Question 3

What happens below the golden rule steady state?

Answer 3

Increases in steady-state capital raise steady state consumption.

Question 4

What happens above the golden rule steady state?

Answer 4

Increases in steady state capital reduce steady state consumption.

Question 5

How can we maximise C/N according to the golden rule level of capital?

Answer 5

Choose the K/N that maximises the distance between steady state investment and output per worker.

Question 6

Why is important to have the correct savings rate to achieve the Golden Rule?

Answer 6

• An increase in the saving rate leads to an increase and then a decrease in steady state consumption per worker.
• The level of capital associated with the value of the saving rate that yields the highest level of consumption in steady state is known as the golden rule level of capital.

Question 7

Describe how, beyond the Golden Rule, over investment is possible.

Answer 7

If an economy has so much capital that it is working beyond the golden rule, increasing savings further will decrease consumption not only now, but also later.

Question 8

Where do the majority of OECD countries sit on the golden rule level of capital scale?

Answer 8

They sit below the golden rule, on the basis that an increase in saving rate raises investment, output and consumption per person.

Question 9

How can policy makers effect a change in the saving rate?

Answer 9

• Public saving - via a budget surplus
• Influence private saving - raise real rate of return payable to savers - through tax exemptions on savings

Question 10

Should policy makers try to raise the saving rate?

Answer 10

Yes - unless the economy is operating above the Golden Rule level of K/N, consumption per worker will increase if the saving rate increases

Question 11

What are the set of skills of the workers an economy?

Answer 11

The human capital.

Question 12

How do economies with many highly skilled workers compare to those with low levels of skilled workers.

Answer 12

Higher skilled economies have higher productivity

Question 13

Expand on how human capital has an effect on productivity.

Answer 13

• Skills and knowledge that is accumulated over time
• Human capital increases labour productivity
• Increased labour productivity leads to higher output - even at current levels of physical capital and labour
• Increase leads to higher steady state level of output and capital
• May explain cross country growth differentials

Question 14

How does an increase in how much society saves in the form of human capital effect the steady state, and the output per worker?

Answer 14

Increases steady state human capital per worker, leading to an increase in output per worker.

Question 15

Production function when the level of output is dependant on level of physical capital per worker (K/N) and also level of human capital per worker (H/N).

Answer 15

• Y / N = f ( K / N , H / N)
• An increase in capital per worker or average skill of workers leads to an increase in output per worker