Suppose the private sector has a given saving rate out of...

Name: Problem 8, Chapter 28: Economics
Uploaded: 2022-03-07T17:24:17-08:00
Duration: 1 min 22 s
Channel: Vaibhav Jain
Description: Suppose the private sector has a given saving rate out of disposable income, but that the public sector levies taxes and utilizes all of this revenue for investment. If the private and public sector are equally efficient, what happens to the long-run growth rate? What happens to per capita incomes eventually?

Suppose the private sector has a given saving rate out of disposable income, but that the public sector levies taxes and utilizes all of this revenue for investment. If the private and public sector are equally efficient, what happens to the long-run growth rate? What happens to per capita incomes eventually?

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Key Concepts

Exogenous Technological Progress

In most long-run growth models, such as the Solow Growth Model, the rate of technological progress is exogenous and solely determines the long-run growth rate. Even when total investment increases through the addition of efficient public investment, the underlying growth rate in per capita income is driven by productivity improvements and not by the level of investment.

Capital Accumulation and Steady-State Levels

The overall level of investment, which now includes both private savings and public sector investment, raises the aggregate capital stock. This higher capital accumulation leads to an increased steady-state level of capital per worker, which in turn results in higher per capita incomes in the long run, even though the long-run growth rate itself remains unchanged.

Public and Private Investment Efficiency

When both public and private investments are equally efficient in transforming funds into productive capital, public investment acts as an additional source of capital formation. This elevates the economy's output levels by raising the capital stock, but since the efficiency is on par and the growth rate is determined by exogenous factors, it does not alter the long-run growth trajectory.

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