Balanced growth path

A balanced growth path is the long-run steady state where an economy’s key variables like output, capital, and consumption grow at the same constant rate.
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Updated on May 30, 2024
Reading time 2 minutes

3 Key Takeaways

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  • A balanced growth path is a steady-state economic equilibrium
  • On the balanced growth path, key variables like output and capital grow at the same constant rate
  • It represents the long-run trend for an economy to grow along

What is a Balanced Growth Path?

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A balanced growth path refers to a steady-state equilibrium in economic growth models where key variables like output, capital, and consumption grow at the same constant rate over time. It represents the long-run trend path along which an economy grows in a balanced and stable manner when all markets clear and there are no major shocks or imbalances.

Importance of a Balanced Growth Path

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  • Provides a benchmark to analyze long-run economic performance
  • Helps study determinants of steady-state growth rates
  • Useful for policy analysis on factors impacting balanced growth rates
  • Deviations from balanced growth may indicate economic imbalances
  • Represents an economy’s maximum sustainable growth trajectory

How a Balanced Growth Path Works

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On a balanced growth path, key economic variables maintain constant growth rates that are consistent with each other and market-clearing conditions. Specifically:

  • Output per worker grows at rate g determined by technological progress
  • Capital per worker and consumption per worker also grow at rate g
  • Labor productivity grows at rate g as technology improves
  • Real wages grow at rate g to match labor productivity gains
  • Capital and output maintain a constant capital-output ratio

Examples of Balanced Growth Paths

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  • The U.S. economy has followed a relatively stable 2-3% balanced annual growth path in recent decades
  • Many developed economies exhibit balanced growth of 1-2% per year
  • Emerging markets may have higher balanced growth of 4-8% during catch-up phases

Real World Application

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Balanced growth path models help explain consistencies in long-term macroeconomic data and growth trends. They guide policies aimed at raising productive capacity and achieving maximum sustainable growth rates over time. Central banks often use balanced growth benchmarks when setting policy to maintain stable growth and employment.


Sources & references

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