A) Explain why the steady state growth rate is independent of the savings rate in the...

A) Explain why the steady state growth rate is independent of the savings rate in the Solow growth model?

B) Suppose two economies A and B exhibit the same exogenous growth rate of the labour force. There is no technical progress and the savings propensities are the same in both economies. The initial capital stock in country A is much larger than that of country B. Compare the transitional dynamics and the steady state growth paths of the two economies.

Expert Solution

A) savings rate is an endogenous factor in Solow model. Tt means that there is diminishing returns to capital. high savings rate increases capital, however, if capital keeps on increasing, then it gives diminishing returns. ultimately there reaches a point where there is no growth in capital accumulation. Hence, savings rate cannot forever increase the rate of growth. So steady state level is independent of rate of savings

B) The two countries are identical in labor growth rate and savings propensities. There is no technical progress. So, they may have the same level of steady state of capital. Capital stock is larger in A than B. then, if both countries are below the identical steady state level, then country B will have a higher growth rate than country A due to lower capital stock. If both countries are above their steady states, then country A will have a higher magnitude of negative growth rate. In the third case, if country A is above steady state level and country B is below steady state level, then B will resgister positive growth rate and A will register negative growth rate.

Rahul Sunny answered 8 months ago

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