5. Consider the Solow growth model with population growth and growth in the efficiency of labor....

 

Transcribed Image Text:

5. Consider the Solow growth model with population growth and growth in the efficiency of labor. Suppose that 2 countries A and B have the same production function given by Y=K (LE)5, the same depreciation rate of physical capital (= 0.03), the same rate of growth of E (g = 0.02), and the same initial level of E, Eo 1. The saving rate in country A is 0.6 and its population growth rate is 3%. The saving rate in country B is 0.4 and its population growth rate is 1%. = (a) Compare the steady-state levels of output per effective worker of these two coun- tries. (b) Assuming that the economy begins at the steady state (or balanced growth path), calculate output per capita in period 0 for each country. Draw the balanced growth paths for these two countries on the same graph (have log of output per capita on the y-axis and time on the x-axis. (c) Assume now that at time 0 country A is below the steady state and country B is above the steady state. Draw on the same graph log of output per capita for these two countries as a function of time starting in period 0 and show how they converge to their balanced growth paths. (d) Do these countries converge to each other in output per capita? Defend your answer. 5. Consider the Solow growth model with population growth and growth in the efficiency of labor. Suppose that 2 countries A and B have the same production function given by Y=K (LE)5, the same depreciation rate of physical capital (= 0.03), the same rate of growth of E (g = 0.02), and the same initial level of E, Eo 1. The saving rate in country A is 0.6 and its population growth rate is 3%. The saving rate in country B is 0.4 and its population growth rate is 1%. = (a) Compare the steady-state levels of output per effective worker of these two coun- tries. (b) Assuming that the economy begins at the steady state (or balanced growth path), calculate output per capita in period 0 for each country. Draw the balanced growth paths for these two countries on the same graph (have log of output per capita on the y-axis and time on the x-axis. (c) Assume now that at time 0 country A is below the steady state and country B is above the steady state. Draw on the same graph log of output per capita for these two countries as a function of time starting in period 0 and show how they converge to their balanced growth paths. (d) Do these countries converge to each other in output per capita? Defend your answer.

Answer rating: 100% (QA)

Solow Growth Model Analysis Country A vs Country B This analysis compares countries A and B using the Solow growth model with population growth and ef... View the full answer