Suppose that the country of Xanadu saves 20% of its income and has a capital–output ratio of 4.

(a) Using the Harrod–Domar model, calculate the rate of growth of total GNP in Xanadu.

(b) If population growth were 3% per year and Xanadu wanted to achieve a growth rate per capita of 4% per year, what would its savings rate have to be to get to this growth rate?

(c) Now go back to the case where the savings rate is 20% and the capital–output ratio is 4. Imagine, now, that the economy of Xanadu suffers violent labor strikes every year, so that whatever the capital stock is in any given year, a quarter of it goes unused because of these labor disputes. If population growth is 2% per year, calculate the rate of per capita income growth in Xanadu under this new scenario.

(d) If you were a planner in Xanadu and could cost Lessly choose the savings rate for that country, how would you go about making your decision? Think about the pros and cons of changing the savings rate and record your opinions here.