One result of this economic formalism is that, regardless of starting point, the dynamics will converge to a balanced path, and a consequence of this formalism is that a change in the savings rate only has a level effect.
One result of this economic formalism is that, regardless of starting point, the dynamics will converge to a balanced path, and a consequence of this formalism is that a change in the savings rate only has a level effect. A critical assumption of this formalism is that the production function has constant returns to scale, and this model gives rise to a first-order (*) differential equation in which the rate of change of the capital stock per unit of effective labor is equal to the difference between actual and break-even investment. This model posits that output is a function of capital and the product of labor and knowledge, and it can be used to show that the accumulation of physical capital can't account for the increase in output per person. For 10 points, identify this exogenous growth growth model that one its first (and sometimes only) namesake the 1987 Nobel.
One result of this economic formalism is that, regardless of starting point, the dynamics will converge to a balanced path, and a consequence of this formalism is that a change in the savings rate only has a level effect.
Solow-Swan growth model