Assume furthermore that the economy is characterized by full employment in the labour market. By normalizing employment to unity (N = 1), the model consists of:

K = I (q, si) – SK, (4.25)

4= (r + 8)q – FK(1, K), (4.26)

where it is clear that the major change caused by our re-interpretation is that the marginal product of capital is no longer constant. Intuitively, since the labour input is fully employed, the economy experiences diminishing returns to capital, since FKK < 0. This also causes the 4= 0 line to be affected:

( 8q) = FKK a K r + 8 T.

< 0 aq) FK '94 =r q=0 q=0

(r+02 <0,--1- 6 >0. (4.27)