Two countries, J and M, have growth rates of 5% and 3% per year, respectively. Both countries
have a production function:

????(????)=????(t)/????

(Y=total output, ????=capital-output ratio, K=total capital).
Both countries have a zero depreciation rate (???? =0) and face similar productivity ????.

i. According to the Harrod-Domar model learned in class, what should explain the
differences in growth rates between J and M? (4)


ii. Suppose the savings rate for M is 15%. Compute the capital-output ratio for M. (4)


iii. What value of θ would M need in order to achieve J’s growth rate? (4)

iv. An analyst proposes that even if M achieves both J’s productivity and savings rate, its
growth rate would still be smaller because M has high levels of capital stock compared to
J. The reason, she suggests, is that the assumptions about the production function they
both face are wrong. Draw a graph of a production function that would generate lower
growth rates at higher levels of capital stock. Label your axes. (4)

v. What is the main feature of the production function you drew that generates a lower
growth rate when the capital stock is higher? (4)

Answer rating: 100% (QA)

i Differences in Growth Rates In the HarrodDomar model the growth rate g is determined by the savings rate s and the capitaloutput ratio v g s v Since ... View the full answer