If the Japanese production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the capital-output ratio is 2.5, the saving rate that is consistent with steady-state growth is:

Question

Quizplus · Accepted Answer

In a Cobb-Douglas production function, the steady-state saving rate (s) is given by s = (n + g + δ) * (K/Y), where n is the population growth rate (assumed to be 0 here), g is the output growth rate (3%), δ is the depreciation rate (4%), and K/Y is the capital-output ratio (2.5). Thus, s = (0 + 0.03 + 0.04) * 2.5 = 0.175 or 17.5%.

If the Japanese Production Function Is Cobb-Douglas with Capital Share