The Ramsey Model is a foundational framework in economic theory that addresses optimal savings and consumption over time. Developed by Frank Ramsey in 1928, it aims to determine how a society should allocate its resources to maximize utility across generations. The model operates on the premise that individuals or policymakers choose consumption paths that optimize the present value of future utility, taking into account factors such as time preference and economic growth.
Mathematically, the model is often expressed through a utility function , where represents consumption at time . The objective is to maximize the integral of utility over time, typically formulated as:
where is the rate of time preference. The Ramsey Model highlights the trade-offs between current and future consumption, providing insights into the optimal savings rate and the dynamics of capital accumulation in an economy.
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