Steady state
A path on which the key ratios stop changing. In neoclassical growth theory, capital per worker is constant and output per worker grows only with technology; in a valuation forecast, it is the stable phase a terminal value captures.
Where you will meet it
Steady state appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Justify the length of an explicit forecast period and how to project past its end
“Beyond the horizon, the analyst assumes a steady state and captures it in a terminal value, using either a perpetual growth formula, where terminal value equals the next year's cash flow divided by the discount rate minus the growth rate, or an exit multiple applied to the final year's earnings.”
- Contrast the classical, neoclassical and endogenous theories of growth
“Neoclassical theory, after Solow, says diminishing returns to capital lead to a steady state in which output per worker grows only with exogenous technological progress; a higher saving rate raises the level of output, not its steady-state growth.”
- Explain the convergence hypotheses and judge how well they hold
“Conditional convergence says catch-up happens only among countries with the same saving rate, population growth and production function, since each approaches its own steady state.”
See also
Practise it
Practise steady state until it is automatic: questions that explain every wrong option.
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