Balanced Growth
Balanced growth means that the ratio of the capital stock to output does not change. On a balanced-growth path, output and the capital stock grow at the same rate, so the ratio of the capital stock to output is always the same: the growth path of the economy is a straight line from the origin. Figure 6.14 shows what a constant ratio of the capital stock to GDP looks like in our production function diagrams. Along any straight line from the origin, the ratio of the capital stock to output does not change. As a simple example, suppose that. “Output and Capital Stock in a Balanced-Growth Economy”) the capital stock is always twice the level of output. This means that output is always half of the capital stock: output = 0.5 × capital stock. This is just the equation of a straight line that passes through the origin. Increases in human capital or technology shift the production function upward. On the balanced-growth path, capital stock grows at exactly the right rate so that the economy grows along a straight line from the origin. The Transition to Balanced Growth If an economy is not yet on its balanced-growth path, it will tend to go toward that path. If a country has a small capital stock relative to GDP, then its capital stock will grow faster than real GDP. Countries that are still developing may well be in this position. Countries that are further along in the development process are likely to be (approximately) on their balanced- growth paths. For such countries, the ratio of capital stock to output is unchanging.
