9712

Solow Growth Model

A single commodity is produced by labor and capital at constant returns to scale. Capital consists of units of the commodity that are saved from previous periods minus units lost through depreciation. The green curve represents the amount of output produced per worker and the red curve represents the amount that is saved and invested. The blue line represents the break-even rate of investment necessary to maintain a level of capital per worker, given depreciation and labor-force growth. If investment is greater than the break-even amount, then capital will be accumulated, raising the level of capital per worker; but if investment is less than the break-even amount, then the level of capital per worker will drop. The steady-state level of capital per worker, , is the equilibrium at which the level of capital per worker remains constant. The dotted yellow line indicates the position of the Golden Rule , at which consumption per worker is maximized.

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