natural growth rate

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The growth rate of national income which would just maintain a constant unemployment rate. If there is no technical progress and the labour force grows at rate g, this will be the natural growth rate. If there is also technical progress at rate ρ, the natural growth rate is given by n = g + ρ. In a Solow growth model the actual growth rate converges on the natural rate, whatever the ratio of saving to income. In a Harrod–Domar growth model, if the warranted growth rate is above the natural rate, the economy will expand until it reaches full employment. At this point growth of actual output must fall below the warranted rate, and there will be a recession. If the warranted growth rate falls below the natural rate, there will be a tendency to ever-increasing unemployment.

Subjects: Economics.

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