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Eduncle posted an MCQ

October 20, 2019 • 16:36 pm

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UGC NET
Economics

'Golden rule of accumulation'refers to the savings rate that :

Choose Your Answer:

A maximises the growth rate of output

B optimises the investment in the economy

C maximises the growing per capita consumption

D None of the above

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Eduncle Best Answer

Edmund Phelps (1961) posed the question in a rather amusing article about the kingdom of Solovia where a certain fellow, Oiko Nomos, won a prize by guessing rightly the best savings rate for the kingdom. He termed the solution to this problem the "Golden Rule" of growth. This is in reference to the old Biblical adage to "do unto others as you would have them do unto you" -- where the "others", in this case, are the future generations of society. Obviously, if a society could choose a savings rate that maximized its own consumption, it would save nothing and consume everything. But that would leave future generations in a lurch as no capital would have been built to enhance future output and consumption. If, conversely, the current generation saved so much that future generations would in fact be better off than the current, then we are also violating "Golden Rule" as we are not doing unto ourselves what we have done for posterity. Thus, the "Golden Rule" condition is that the collectively-chosen or policy-imposed savings propensity is such that future generations can enjoy the same level of consumption per capita as the initial one.

Mathematically, finding the conditions for "Golden Rule" growth translates itself into finding the saving propensity that maximizes consumption per capita which is consistent with steady-state growth.
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