How is the equation for consumption represented in the Solow Model?

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In the Solow Model, consumption is represented as c = (1 - s)y, where c stands for consumption, y represents total output (or income), and s is the savings rate. This formula is derived from the understanding that the economy’s total output can be divided into consumption and savings. The savings rate indicates the portion of output that is saved and not consumed.

Since the total output y can be used for either consumption or saving (investment), the portion that is consumed is what remains after accounting for savings. Thus, consumption c is equal to total output y minus the savings, which is given by the product of the savings rate s and income y (i.e., sy).

Hence, consumption can be rewritten as c = y - sy, which simplifies to c = (1 - s)y. This equation has significant implications for understanding how changes in the savings rate, output levels, or investment can affect overall consumption in the economy, highlighting the interrelationship between these variables in the Solow growth model context.