Abstract
This study analyzes the effects of Solow growth model in the Chinese economy. The study also illustrates how Golden rule affects the operations of an economy. The study stipulates the significant effects of both the Solow model and the Golden rule in the economic and population growth in the Chinese. Various factors and variables such as the savings rate, capital growth rate and the labor ratio in the Chinese economy. The study specifically uses the characteristics of the Solow model in the Chinese economy to stipulate the growth in China. The GDP of China is thus explained by the characteristics of the Solow growth model. The uses statistics and data from the United Nations website. The data is used in the study to indicate the specific methodology of analyzing the economic variables affecting the economic growth in China. The study also stipulates the contributions of Solow model and Golden Rule in learning the economic growth theories.
Introduction
Growth rate theories play a significant role in the development of the economy. Growth rate methods indicate why some countries are poor while others are wealthy. These principles enable governments of various countries to develop different policies and rules that are fundamental to the growth of the respective economies. The growth rate methods also facilitate learning of how the growth rate of a particular country is affected by the government policies. This study analyzes the Solow Model and Golden rule growth theories in China.
Solow Model
Solow model is the most commonly used growth rate approach. The theory by Robert Solow, a Nobel Prize winner plays a significant role in economic growth analysis of various economies. Robert Solow made numerous contributions to the study of the economic growth of different countries and the teaching on the financial aspect. Solow Model helps in the development of policies in the various countries. The Solow model is also significantly used as a tool for the literature review. Most of the growth theories are compared with the Solow model to determine their level of accuracy. Solow model majorly calculates the determinants of the economic growth and long-run standards of living in various economies. Solow model is a neoclassical economic development and preferred in different economies across the world (Bai & Chong 311). Solow model comprises of three separate factors of GDP. The factors include labor (L), capital (K) and knowledge (A). The model also employs the use of efficient labor (AL). Solow model is made up of various assumptions. The proportion of production saved in the economy for different investments is perceived to be constant in the economy. The model also considers the rate of depreciation in the economy to be constant. The respective output (Y) and savings (S) are assumed by the model to be affecting the capital growth (K) directly in the economy. Solow model ignores various factors in the economy. It ignores the government factors in the economy, the various goods in the economy, the existence of natural resources, social institutions, the changes in the employment rate and the geographical factors in the economy. The graph below indicates the Solow model outline.
The model, therefore, postulates that countries with identical characteristics end up at the same steady state. The model indicates that the value of capital (K) and savings rate(S) are the same in both the two countries. Solow growth model divides the increase of the specific economy into different segments. It stipulates that production is a function of both labor and capital.
Y = F (K, L)
YL = F (KL, LL)
Y = f (k) (1)
K is the capital per every worker
Y is the level of output per single worker.
The slope of the function is thus given as marginal productivity of capital, MPK.
F0 (k) = MPK
The individuals therefore use everything that they do not save
C = (1s) y (2)
The remaining output is invested or allocated for use.
Y = c + i (3)
Combination of the two equations gives i = sy
Golden rule
Golden Rule is the saving rate maximization of the steady state of growth of consumption in the Solow model. The rule stipulates the need for every consumer to be happy and improves the living standards. It shows that the more an individual consumes, the more comfortable he becomes. The aim of this rule is thus to maximize the respective consumptions of the individual worker, C. Golden Rule is, therefore, the steady position associated with the particular outcome in the economy. The calculation of this phenomenon is fundamental in economics since it is through this that the individual consumers are satisfied and made happier in the economy.
Variables such as the consumption rate, savings rate, the population growth rate and the economic growth rate are very fundamental in the calculation of both the Golden Rule and the Solow model.
Characteristics of Solow model in China
This study uses China as the case study economy to determine the applicability of Solow model and Golden Rule. The study replicates the US Solow model and Golden Rule to the economic conditions in China. Solow model determines the rate of growth of living standards in a country by the use of savings, technological changes and population growth in the country. The use of Solow model has significantly increased in the Chinese economy. It is used to determine the growth rate of China. The model has been used to determine the savings rate, per capote income and population. According to Solow model a country with low savings rate register a small capital stock. A lower savings rate indicates that the residents of the particular country prefer more consumption to less saving. The capital share is, therefore, minuscule as a result of the low savings rate. The economic growth will, therefore, reduce in the economy. The increase in the growth of workers occurs in fall of capital per employee. Solow model stipulates that countries with higher population growth register a much lower GDP per individual in the country. The output ratio and the level of depreciation in a country are significantly affected by the individual capital growth. Golden rule plays a significant role in the determination of economic conditions using Solow model. The Golden rule is used to explain the changes in depreciation and output in a country. A country with a capital ratio lower than the value of the Golden Rule is likely to experience an upsurge in production than in depreciation if capital increases. It will result in the growth in the consumption level in the country. When the capital position is higher than the Golden Rule the consumption level decreases in the country. Solow model states that other factors are affecting economic growth other than the consumption level. Solow model significantly explains the economic development of the Chinese economy. The saving rate in China is very high at 20%. It results in higher capital stock in China. The level of output in China is, therefore, microscopic (Darong & Kunrong 420).The majority of the individuals in China prefer immediate saving to present consumption. They save a lot with the expectation to consume a lot in the future. The level of personal income in the Chinese economy has significantly grown over the last few years. People are, therefore, able to ensure higher savings irrespective of the growing living conditions in China. The economic growth will therefore continuously grow as a result of the increase in personal income level. China had a very low population in the last years. The average number of children per family in China was initially of one child per family. It led to lower population growth in China resulting in the significant increase in the GDP of the Chinese economy according to Solow model. China also has a higher capital growth rate. It will lead to the growth in the output and individuals rate of consumption in the Chinese economy. According to Solow, model China has not experienced changes in the capital stock as a result of the continuous increase in the savings rate. The variations in the capital will have significant effects on the economic growth of Chinese economy in the short run. The GDP will be significantly high over the near future. According to the Solow model, this will increase the consumption level over the near future. Solow model also stipulates that in the long run China will reach a Golden Rule position where the resultant GDP per every individual head will be constant. It is precisely the point of equilibrium where the other forces of the Solow model remain constant in the Chinese economy. It, therefore, significantly affect the production output in China.
Methodology
This study employs both qualitative and quantitative methods of data collection to ensure the availability of the required data from the Chinese economy. Statistics are taken from the economy to determine the exact value of the various variables affecting the determination process of Solow model and specifically the Golden Rule. Data books and different templates are used in the study to record the various data and statistics required in the survey. Various fiscal and monetary policies in the economy indicate the factors affecting the Solow model. It has enabled the efficient determination of the Solow model and Golden rule in the Chinese market. The study uses the data and statistics from the United Nations website (Bai & Chong 293). The methods, therefore, determines the Solow model and the Golden Rule in China as calculated below:
The aggregate production function is given as:
F (K, L) = KL
K + L
n = 0.4
The Solow’s equation for the evolution of capital labor ratio
f (k) = F (K, L)
L
= KL
K+L
L
= K
K + L
= K/L
K/L + 1
= K
K + 1
(b) Consumption per capita in the steady state
S = 0.2
Initial capital labor ratio is 1
dk = 0
dt
0 = s f (k) – nk = s K /K + 1 - nk
K = s/n – 1
0.2/ 0.4 – 1 = 4
In the long run f (4) = 4/4+1 = 0.8
Savings per capita sf (k) = 0.2 X 0. 8
= 0.16
Consumption per capita = 0.8 – 0.16
= 0.64
(c) The Golden Rule saving rate
f = f (k)
= 1/k + 1 - 1/ k +1
= 1
(k + 1) (k + 1)
= 1/ (4+ 1) (4 + 1)
= 0. 04
Conclusion
The savings rate of the Chinese economy is very high at 20%. This indicates that the individuals in the Chinese economy prefer current saving to future consumption. The level of personal income in the economy has significantly grown in the Chinese economy making it easy to embracing saving by most individuals (Darong & Kunrong 197). The savings rate is, therefore, higher than the Golden Rule savings rate in the Chinese economy. Solow model is, therefore, a perfect tool to determine the effectiveness of the workers in the economy at any given time. The Chinese government should, therefore, ensure steady increase in the efficiency of the workers. This subsequently increases the output per every employee in the economy.
Work Cited
Bai, Chong-En. "China’s structural adjustment from the income distribution perspective." China Finance and Economic Review 3.1 (2015): 1-10.
Darong, D. A. I., and S. H. E. N. Kunrong. "A turnpike theorem involving a modified Golden Rule." Theoretical & Applied Economics 20.11 (2013).
