Final answer:
In the Solow model, increases in the savings rate and productivity would improve long-run living standards, while an increase in population growth may dilute them. Factors such as environmental quality, crime rates, variety of goods, and infant mortality affect the standard of living but may not be fully captured by GDP measurements.
Step-by-step explanation:
According to the Solow model, various events can affect long-run living standards in different ways:
An increase in the savings rate would likely increase long-run living standards. Higher savings can lead to more investment in capital, which, through capital deepening, can improve productivity and thus increase output per worker over time.
An increase in the population growth rate might lower long-run living standards, as it could lead to a dilution of capital stock unless accompanied by corresponding increases in capital investment.
A one-time improvement in productivity would temporarily increase long-run living standards by boosting output without requiring additional inputs; however, without continuous improvements, the effect may dissipate over time as the model predicts convergence back to a steady state growth path that is determined by technology growth, savings, and population growth.
When interpreting changes in GDP in relation to living standards, there are factors that may cause GDP to overstate or understate the degree of change in the broad standard of living:
If the environment becomes dirtier, it may negatively impact living standards despite GDP growth, causing GDP to overstate improvements in living standards.
When the crime rate declines, this likely enhances well-being and living standards, but such changes may not be fully captured by GDP.
A greater variety of goods becoming available to consumers enriches living standards, but this variety is not directly measured in GDP, potentially causing an understatement of the improvement in standards of living.
A decline in infant mortality reflects improvements in healthcare and well-being, but these improvements are also not directly reflected in GDP, leading to an understatement of the enhancement in living standards.