Higher savings permanently affect Y,K,Y/K but not Gy/k. Why?
Share
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
According to the NeoClassical Theory, rapid growth that is above the steady-state rate of growth occurs when countries first begin to accumulate capital; but growth will slow as the process of accumulation continues. Long-term sustainable growth cannot rely solely on capital deepening investment—that is, on increasing the stock of capital relative to labour. If the capital-to-labour ratio grows too rapidly (i.e., faster than labour productivity), capital becomes less productive, resulting in slower rather than faster growth. More generally, increasing the supply of some input(s) too rapidly relative to other inputs will lead to diminishing marginal returns and cannot be the basis for sustainable growth.
The initial impact of a higher saving rate is to temporarily raise the rate of growth in the economy. In response to the higher saving rate, growth exceeds the steady-state growth rate during a transition period. However, the economy returns to the balanced growth path after the transition period. During the transition period, the economy moves to a higher level of per capita output and productivity. Once an economy achieves steady-state growth, the growth rate does not depend on the percentage of income saved or invested. Higher savings cannot permanently raise the growth rate of output.