Question

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

Answer 1

According to the Solow model, The level of capital per effective labor depends on yhe following factors:

i) Savings rate: the higher the savings rate, the higher will be the investment and capital per effective labor and vice-versa.

ii) Depreciation rate: the higher tje depreciation rate, the lower will be the level of capital per effective labor.

iii) Population growth rate: the higher the population growth rate, the lower will be capital per effective labor and vice versa.

iv) Technological growth rate: the higher the technological growth rate, the higher the break even investment required and thus the lower will be capital per effective labor and vice versa.

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