Why Saving More Can't Grow You Forever

Lesson notes

Key points

• In the Solow model, output per worker depends on capital per worker, and capital has diminishing marginal returns.
• Capital per worker rises when investment, saving times output, exceeds depreciation plus population growth.
• Where saving exactly covers that break-even investment, the economy reaches its steady state and capital per worker stops rising.
• So higher saving raises the level of income, but only technological progress sustains growth in income per worker.

Definitions

Diminishing returns

Each extra unit of capital per worker adds less output than the previous unit.

Takeaway: Saving changes the level; technology drives sustained growth.

Diminishing returnsCapital accumulationSteady stateTechnology