1. Macroeconomic Analysis 2003
Golden Rule of Saving and Capital Accumulation
Lecture 3

2. Lecture 3

3. Saving rate affects level of income but not the growth rates
How does a higher saving rate affect the level of output in the steady state?
High saving country
Low saving country
Saving rate affects level of income but not the growth rates
Lecture 3

4. How does the technological advancement affect the per capita capital and per capita output in the steady state?
Advanced Technology
Primitive Technology
Lecture 3

5. Golden Rule for Saving and Capital Accumulation
C-max Kg
Kss
Lecture 3

6. Golden Rule of Saving
Lecture 3

7. A Numerical Example for the Golden Rule of Saving
Lecture 3

8. How High Should be the Saving Rate
How High Should be the Saving Rate? Saving Rate that Maximises Consumption
C-max = 1.25
y = 0.5*k0.5
y=2.5
Consumption
k = 25 s5 s4 s1 s2
s*=1.25
Saving rate
Lecture 3

9. Lecture 3

10. Lecture 3

11. Lecture 3

12. Lecture 3

13. Lecture 3

14. Lecture 3

15. Optimal Saving and Consumption in Two Period Model
Lecture 3

16. A Three Period Optimal Consumption-Saving Model
Lecture 3

17. Four Optimisation Conditions
Lecture 3

18. Consumption and Savings in Three Periods
Lecture 3

19. Policy Issues: Tax, Saving and Consumption
What is the impact in consumption and saving in the above model
If there is a 20 percent tax on interest income?
If there is a 20 percent subsidy in it?
What sort of tax system is better for increasing the ratio of saving? Does a higher rate of VAT promote saving or consumption?
Does a higher rate of tax on labour income encourage or discourage saving?
Does a higher rate of tax on pension income increase saving or consumption?
Lecture 3

20. Which sectors are hit hard when the labour income is taxed more heavily than the capital income?
Do workers in the
Service sector
lobby for
Higher capital
income tax?
Lecture 3

21. Which Sectors are important for a higher economic growth in the Yorkshire and Humberside region? (annual growth rates)
Lecture 3

22. Why is the Manufacturing Sector So Important for Economic Growth?
Lecture 3

23. Lecture 3

24. Exercises Calculate the saving rate consistent with the golden rule
Study of Relative income levels across regions in the UK
Study of economic growth in Hulls and Humberside
Which are the leading sectors of Economic Growth in the UK and in the Yorkshire and Humberside?
Lecture 3