Suppose that we are comparing two countries, and, that are similar in every respect except the education of their population. The production function of both countries is represented by , where Y= output, A= productivity, K= capital stock, L= raw labor, and= the quality (in the form of years of education) per worker.

In Country, all adults have an average of 10 years of schooling.In Country, all adults have an average of 4 years of schooling. Assume that the return to education is 20% per year for the first four years of schooling (grades 1-4), 14% per year for the next four years (grades 5-8), and 7% per year for education beyond eight years.

Using the Solow model of economic growth, calculate the ratio of output per worker in the steady state in the two countries.

44. Suppose that we are comparing two countries, Venezuela and the Netherlands where the actualGDP per capita in 2012 were $4000 and $40,000 respectively.Assuming that both countries have the same production function, , the same values of (at 5%) and that the value of is 1/3.

The following table shows data on rates of savings (s), population growth rates (n) and years of schooling in the two countries :

Country

s (%)

n (%)

Years of schooling

Venezuela

5

4

4

Netherlands

20

0

10

A) Suppose you only have access to the rates of savings and population growth data but do not have access to the data on years of schooling (the last column of the table), use the Solow model to calculate the ratio of the steady state levels of income per capita of Venezuela to the Netherlands.

B) Suppose you are told the average years of schooling in each country.Using the same returns to schooling as in question 3 above as well as the data on savings rates and population growth rates, now calculate the ratio of output per worker in the steady state that the Solow model predicts in the two countries where the production function now is y = kh^1-.

Carefully explain and interpret your answers to parts a) and b) above.