Consider the Solow diagram we have studied in class. Why is the intersection of

Question

Consider the Solow diagram we have studied in class. Why is the intersection of the saving per person curve and the break even investment line the steady-state equilibrium? At this point, consumption and saving are balanced, leading to an optimal level of accumulated physical capital O This is where the level of output equals the depreciated value of physical capital, keeping the value of accumulated physical capital constant. At this point, the rate of saving equals the rate of depreciation, which keeps the value of accumulated capital constant O This is where the level of investment per person equals the depreciated value of physical capital and the new physical capital that must be built for new workers, keeping the value of accumulated physical capital constant

Explanation / Answer

If the model considers population growth then answer is
At this point, the rate of saving equals the rate of depreciation, which keeps the value of accumulated capital constant.

If the model does not consider population growth then answer is,
This is where the level of investment per person equals the depreciated vaue of physical capital and the new physical capital that must be built for new workers, keeping the vazlue of accumulated physical capital constant


Please refer to the diagram you studied in class to find out whether there is population growth or not.

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