Steady state
Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT
Meaning
In the Solow growth model, the steady state is the long-run point where capital per worker (k), and therefore output per worker, stop changing. It is reached when investment per worker exactly covers what is needed to keep k constant:
s·f(k) = (n + δ)k
Here s = saving rate, f(k) = output per worker, n = labour-force growth and δ = depreciation rate. Below the steady state, saving is more than enough, so k rises. Above it, saving falls short, so k falls.
Example
Suppose an economy saves 20% of output. If this saving is just enough to replace worn-out machines (δ) and equip new workers (n) at the current level of k, capital per worker stays constant. A higher saving rate would move the economy to a new steady state with a higher k. It would not bring permanently faster growth.
Don't confuse with
- Zero growth: in the steady state, total output still grows along with the labour force (n). Only output per worker stays constant, unless there is technical progress.
Related concepts
- Solow growth model
- Capital deepening
- Growth accounting
- Total factor productivity
- Convergence
- Endogenous growth theory