Capital Growth Paths of the Neoclassical Growth Model
Figure 1
Capital growth premium: aid effect on capital stock.
Equation (20) can be summarised as , of which the terms
and
are constants. It holds that
if α>β; from Equation (24), it also holds that
as well. Thus, once the economy has received the permanent effect of foreign aid on k attributable to the change in its steady-state level,
, the scale of the remaining effect, hereby called the growth premium rewarding the ‘correct’ allocation of aid resource, is proportional to the term
irrespective of the magnitude of the coefficient
. The situation is same for
and opposite (showing the negative effect of the same absolute value) for
and
. The diagram shows a sample case where N = 0.05 and α+β = 0.8.