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    2.3.2 Balanced Growth: α ∗ Y K - (2.14) /K /K

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    Akash Kumar
    1) The document discusses the conditions necessary for sustained economic growth, noting that sustained growth in capital alone will eventually lead to diminishing returns and low rates of return that households won't accept. 2) It then introduces the concept of a "balanced growth path" where real interest rates, labor input, and the growth rates of output, consumption, investment and capital are all constant over time. 3) For an economy to be on a balanced growth path, the growth rate of technology must intrinsically determine the constant growth rates of other macroeconomic variables.

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    2.3.2 Balanced Growth: α ∗ Y K - (2.14) /K /K

    Uploaded by

    Akash Kumar
    17 views2 pages
    1) The document discusses the conditions necessary for sustained economic growth, noting that sustained growth in capital alone will eventually lead to diminishing returns and low rates of return that households won't accept. 2) It then introduces the concept of a "balanced growth path" where real interest rates, labor input, and the growth rates of output, consumption, investment and capital are all constant over time. 3) For an economy to be on a balanced growth path, the growth rate of technology must intrinsically determine the constant growth rates of other macroeconomic variables.

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    1) The document discusses the conditions necessary for sustained economic growth, noting that sustained growth in capital alone will eventually lead to diminishing returns and low rates of return that households won't accept. 2) It then introduces the concept of a "balanced growth path" where real interest rates, labor input, and the growth rates of output, consumption, investment and capital are all constant over time. 3) For an economy to be on a balanced growth path, the growth rate of technology must intrinsically determine the constant growth rates of other macroeconomic variables.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    17 views2 pages

    2.3.2 Balanced Growth: α ∗ Y K - (2.14) /K /K

    Uploaded by

    Akash Kumar
    1) The document discusses the conditions necessary for sustained economic growth, noting that sustained growth in capital alone will eventually lead to diminishing returns and low rates of return that households won't accept. 2) It then introduces the concept of a "balanced growth path" where real interest rates, labor input, and the growth rates of output, consumption, investment and capital are all constant over time. 3) For an economy to be on a balanced growth path, the growth rate of technology must intrinsically determine the constant growth rates of other macroeconomic variables.

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    You are on page 1of 2

    Now, take equation (2.

    9), the optimality condition for a firm’s use


    of capital, and divide both sides by Kt :
    α ∗ Yt
    Kt
    = rt . (2.14)
    Holding labor and technology fixed, as capital increases Yt/Kt
    declines. At some point, α ∗ Yt/Kt will be less than the rental rate
    on capital rt . Since the rental rate is linked to households’ required
    after-tax return on savings (discussed later in this chapter), at some
    point households stop investing in capital because the rate of return
    on additional investment is too low.
    To sum up: sustained growth in the per-capita labor input is impossible,
    and sustained growth in the per-capita stock of capital, holding
    labor and technology fixed, yields after-tax rates of return on capital
    that are too low for households to accept. Thus, sustained growth
    in real GDP and real wages can only be achieved through sustained
    growth in technology.
    2.3.2 Balanced Growth
    In the postwar period, the US has been on a “balanced-growth path.”
    On a balanced-growth path,
    • real interest rates (the pre-tax pre-depreciation marginal product of
    capital) are trendless;
    • the per-capita labor input is trendless;
    • output, consumption, investment, and capital all increase at the
    same rate;
    • the rate of growth of output, consumption, investment, and capital
    is intrinsically linked to the rate of growth of technology.
    In Chapter 1, we showed that the consumption-output and
    investment-output ratios have been trendless, or close to it, sincewhere δ is the constant depreciation
    rate on capital. Substituting in the
    capital-stock accounting equation into the GDP accounting equation
    yields:
    Yt = Ct + Kt+1 − Kt(1 − δ).
    Divide both sides by Yt and use the trick that 1/Yt = (1/Yt+1) ∗
    (Yt+1/Yt ):
    1 = Ct
    Yt
    +
    _
    Kt+1
    Yt+1
    __
    Yt+1
    Yt
    _
    −
    _
    Kt
    Yt
    _
    (1 − δ). (2.15)
    In balanced growth, the capital-output ratio (Kt+1/Yt+1 and Kt/Yt ),
    the growth rate of output (Yt+1/Yt ), and the depreciation rate (δ)
    are all constant. Since the number 1 and the depreciation rate δ are
    also constants, equation (2.15) shows that the consumption-output
    ratio must also be constant in a balanced growth environment. Now
    return to the GDP accounting equation and divide both sides by Yt
    such that:
    1 = Ct
    Yt
    + It
    Yt
    .
    Since the consumption-output ratio is a constant, the investmentoutput
    ratio must also be constant.
    Summing up, in a balanced-growth environment, interest rates are
    trendless, implying that capital and output increase at the same rate
    (which is determined by the rate of growth of technology).When capital
    and output increase at the same rate,GDPaccounting implies that
    the consumption-output and investment-output ratios are constant

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