1 Consider the simple Solow model What is the optimal saving

1) Consider the simple Solow model. What is the optimal savings rate? 2) Alwyn Young (1995) studying the growth performance of Asian Tigers finds that while productivity growthplayed a large role in the growth of Hong Kong\'s income Singapore\'s income growth was almost entirely driven by factor He interprets this result as a bad news for Singapore. Why? 3) Discuss recent evidence on inequality all around the world.

Solution

1. The Golden Rule or optimal savings rate is that rate of savings that maximizes steady state level or growth of consumption as in the Solow growth model. A steady state savings rate of 100% in Solow model denotes that all income is going to investment capital for forthcoming production which indicates zero steady state consumption level. Zero percent savings rate means no new creation of investment capital, thus without replacement there is a capital stock depreciation. Consequently, steady state becomes unsustainable except for zero output, which also denotes zero consumption level. Therefore, somewhere in between is the level of savings (optimal or golden rule) at which savings propensity is at the level which makes it possible for per-capita consumption to be at maximum possible constant value or at this saving propensity highest level of permanent consumption can be sustained.