Question

Problem 5 Investigate how the real rental price of capital and the real wage rate w changes over time in the Solow model with technical progress.

Answer 1

In solow model there is a variety behaviour in terms of factor prices mainly in steady state. In steady state when there is a technical progess the government , firms and educational institutions will try to make investment in technology as they are already achieving it. So there will be a free rider problem in steady state where every one will be benefitted with ones hard work.

So when there is technical progress in steady state solow model the real wage rate always grows at the same progress where as the real rental price of capital will remain constant. The main reason when there is a technological process which occurs over time the GDP per capita will also increases which increases the real wage rate. At this point the rental price on capital will almost be equal or same over this period ,so it will be constant.

This scenario is even proved in case of USA