Saving, Capital Accumulation, and Output. Interactions Between Output and Capital. Two important relations in the long run are: The amount of capital determines the amount of output being produced.
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Which means that, at each period, higher capital per worker leads to higher output per worker.
Output and Investment:
Investment and Capital Accumulation:
In words, the change in the capital stock per worker (left side) is equal to saving per worker minus depreciation (right side).
investment during year t
depreciation during year tDynamics of Capital and Output
When capital and output are low, investment exceeds depreciation, and capital increases. When capital and output are high, investment is less than depreciation and capital decreases.
In steady state, the left side of the equation above equals zero.
which is equal to zero.
Other things equal, countries with a higher saving rate will achieve higher output per worker.
A country with a higher saving rate achieves a higher level of output per worker in steady state.
An increase in the saving rate leads to an increase, then to a decrease, in consumption per worker in steady state.
It takes a long time for output to adjust to its new higher level after an increase in the saving rate. Put another way, an increase in the saving rate leads to a long period of higher growth.