Golden Rule

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Macroeconomic Analysis 2003
Golden Rule of Saving and Capital Accumulation
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How does a higher saving rate affect the level of
output in the steady state?
High saving country
Low saving country
Saving rate affects level of income but not the
growth rates
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How does the technological advancement affect the
per capita capital and per capita output in the
steady state?
Advanced Technology
Primitive Technology
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Golden Rule for Saving and Capital Accumulation
C-max
Kg
Kss
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Golden Rule of Saving
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A Numerical Example for the Golden Rule of Saving
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How High Should be the Saving Rate? Saving Rate
that Maximises Consumption
C-max 1.25
y 0.5k0.5
y2.5
Consumption
k 25
s5
s4
s1.25
s1
s2
Saving rate
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Optimal Saving and Consumption in Two Period Model
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A Three Period Optimal Consumption-Saving Model
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Four Optimisation Conditions
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Consumption and Savings in Three Periods
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Policy IssuesTax, Saving and Consumption

• What is the impact in consumption and saving in
  the above model
• If there is a 20 percent tax on interest income?
• If there is a 20 percent subsidy in it?
• What sort of tax system is better for increasing
  the ratio of saving? Does a higher rate of VAT
  promote saving or consumption?
• Does a higher rate of tax on labour income
  encourage or discourage saving?
• Does a higher rate of tax on pension income
  increase saving or consumption?

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Which sectors are hit hard when the labour income
is taxed more heavily than the capital income?
Do workers in the Service sector lobby for
Higher capital income tax?
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Which Sectors are important for a higher economic
growth in the Yorkshire and Humberside region?
(annual growth rates)
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Why is the Manufacturing Sector So Important for
Economic Growth?
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Exercises

• Calculate the saving rate consistent with the
  golden rule
• Study of Relative income levels across regions in
  the UK
• Study of economic growth in Hulls and Humberside
• Which are the leading sectors of Economic Growth
  in the UK and in the Yorkshire and Humberside?