Nation A has a well-developed financial system, where resources flow to the capital investments with the highest marginal product. Nation B has a less developed financial system from which some would-be investors are excluded.
a. Which nation would you expect to have a higher level of total factor productivity? Explain.
b. Suppose that the two nations have the same saving rate, depreciation rate, and rate of technological progress. According to the Solow growth model, how does output per worker, capital per worker, and the capital–output ratio compare in the two countries?
c. Assume the production function is Cobb– Douglas. Compare the real wage and the real rental price of capital in the two countries.
d. Who benefits from having a better-developed financial system?