Terms in this set (75)

TRUE. The AK model of economic growth assumes that the marginal product of capital is not diminishing, so that growth through capital accumulation can continue even in the long run. A higher saving rate allows more capital accumulation to take place without running into diminishing returns, which leads to permanently faster output growth. In the standard Solow growth model that assumes a production function with diminishing marginal returns to capital, a higher saving rate provides only a transitory boost to growth. In spite of the differences in implications, the AK model can be analysed with a diagram similar to the one used for the Solow model. This diagram has capital per person k = K/L on the horizontal axis and output per person y = Y/L on the vertical axis. The AK production function is Y = AK, which implies y = Ak in per-person terms. This is a straight line, unlike the concave-shaped production function found in the Solow model (where the concave shape indicates diminishing returns to capital). The change in the capital stock is the difference between the 'saving' line (the production function scaled by the saving rate s) and the 'depreciation' line (a straight line with slope δ + n). Increasing the saving rate from s to s0 pivots the saving line upwards. This increases the gap between it and the depreciation line, implying more capital accumulation. Since both lines are straight (unlike the Solow model), the increase in capital accumulation persists into the future, so growth is permanently higher.