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Nilanjan Bhowmick AIR 3, CSIR NET (Earth Science)
- UGC NET
- Economics
In the basic neo-classical growth model, where does the growth equilibrium occur ?
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The demand for goods in the neo-classical growth model comes from consumption and investment. In other words, output per worker y is divided between consumption per worker and investment per worker i : y = c + i. This equation is the per worker version of the national income accounts identity for an economy. The Neo-classical growth model assumes that each year people save a fraction, s, of their income and consume a fraction (1 – s). We can express this idea with the following consumption function: c = (1 – s) y, where s is the saving rate and 0 < s < 1. Here, s is exogenously set. Substituting (1 – s) y for c in the national income accounts identity and rearranging the terms, we obtain :I = sy
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