Essay: The Break-even Investment

Essay: The Break-even Investment

The technological progress in the Solow model calculates the break-even investment that shows the amount of investment necessary to keep k constant. The equation (d+n+g) k = break-even investment (Frhr, 2007).

The simple model consists of dk to replace depreciating capital, nk to provide capital for new workers and gk to provide for the new effective. The Golden Rule with technological progress indicates the level of capital accumulation. The Golden Rule indicates the steady state that has the highest level of consumption. To determine the Golden Rule capital stock it is important to express c in terms of k. According to the simple model y = c + i, meaning that c = y – i. This can also be rewritten as c = f (k) – s f(k) which, in the steady state, means that c = f(k) – dk. This indicates that to capitalize on consumption, it is important to have the greatest difference between y and depreciation.

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