Chapter 7. The Solow Growth Model

An increase in the rate of population growth will result in a decrease in output per capita because it is now necessary to share the existing output with more workers. The existing capital also must be shared with more workers so this will reduce capital per capita and this in turn reduces output per capita. Given output per capita is lower then consumption per capita will also be lower.

An increase in the saving rate will lead to an increase in investment and this in turn will increase capital. The increase in capital per capita will lead to an increase in output per capita and this will increase consumption per capita.

An increase in the saving rate will lead to an increase in investment and this in turn will increase capital. The increase in capital per capita will lead to an increase in output per capita and this will increase consumption per capita. Eventually a new steady state is reached and at this point the growth rate of output per capita will return to its original level. In a model with no technological change, the steady state growth rate of output per capita is equal to the rate of population growth.

The model assumes capital depreciates at a given rate so when the level of the capital stock increases, the level of depreciation will also increase. The model also assumes that there are diminishing returns to capital per worker, so an increase in the level of the capital stock will increase the capital per capita and this will lead to a decrease in the marginal product of capital.