Suppose that a country's production function is [ Y=2 sqrt{K} sqrt{A N} ] and that the savings

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Suppose that a country's production function is

\[
Y=2 \sqrt{K} \sqrt{A N}
\]

and that the savings rate, s, is equal to \(20 \%\) and the depreciation rate, \(\delta\), is \(10 \%\). Suppose further that the labor force grows by \(1 \%\) each year and that the rate of technological progress is \(6 \%\) per year.

a. Calculate the values of i. the steady-state level of capital per effective worker ii. the steady-state level of output per effective worker iii. the growth rate of output per effective worker iv. the growth rate of output per worker v. the growth rate of output

b. Suppose that the labor force now grows at \(5 \%\) per year. Calculate the changes in the values obtained in part (a). Compare parts (a) and (b) and comment.

c. Suppose that the country experiences a technological setback, and now grows at \(2 \%\) a year while the labor force continues to grow at 5\%. Recompute the answers to part (b). Compare and comment with respect to (a).

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Macroeconomics

ISBN: 9781292160504

7th Global Edition

Authors: Olivier J. Blanchard

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