Question

Explain what factors determine how much investment is required to maintain a given level of capital per effective worker.

Answer 1

ANSWER :

BY THE SOLOW MODEL

The level of capital per effective labour depends on the following factors:

• Savings rate :

If   higher the savings rate, the higher will be the investment and capital per effective labour and vice-versa

• Depreciation rate:

Higher the depreciation rate, the lower will be the level of capital per effective labour.

• Population growth rate:

Higher the population growth rate, the lower will be capital per effective labour and vice versa.

• Technological growth rate:

  Higher the technological growth rate, the higher the break even investment required and thus the lower will be capital per effective labour and vice versa.