The Golden Rule: Saving That Maximises Consumption

Lesson notes

Key points

• In the Solow model, each saving rate gives a different steady state, the point where capital per worker stops changing.
• Steady-state consumption equals output minus the investment needed to keep capital per worker constant.
• Consumption peaks where the marginal product of capital equals depreciation plus population growth, called the Golden Rule.
• If MPK is below δ plus n, the economy has too much capital, so saving less raises consumption now and later.

Definitions

Steady state

Capital per worker is constant because investment exactly covers depreciation and population growth.

Takeaway: Golden Rule: choose k where MPK = δ + n to maximise consumption.

Steady stateConsumptionGolden RuleDynamic inefficiency