Economic growth and economic development 69

Introduction to Modern Economic Growth k(t+1) 45° sf(k(t))+(1−δ)k(t) k* ε k* k(t) Figure 2.3 Unique steady state in the basic Solow model when f (0) = ε > two other purposes First, it depicts the levels of consumption and investment in a single figure The vertical distance between the horizontal axis and the δk line at the steady-state equilibrium gives the amount of investment per capita (equal to δk∗ ), while the vertical distance between the function f (k) and the δk line at k∗ gives the level of consumption per capita Clearly, the sum of these two terms make up f (k∗ ) Second, Figure 2.4 also emphasizes that the steady-state equilibrium in the Solow model essentially sets investment, sf (k), equal to the amount of capital that needs to be “replenished”, δk This interpretation will be particularly useful when we incorporate population growth and technological change below This analysis therefore leads to the following proposition (with the convention that the intersection at k = is being ignored even when f (0) = 0): Proposition 2.2 Consider the basic Solow growth model and suppose that Assumptions and hold Then there exists a unique steady state equilibrium where 55