Question

Transition dynamics, more: Explain the following statements:

a) The Solow growth model tells us that poorer countries ought to grow faster than richer countries?

b) If two countries have the same k, the country with the higher investment rate grows faster than the country with a lower investment rate.

c) Statement a) is true if ?̅, ?̅, ??? ?̅ are the same for all countries. It may not be otherwise.

d) The Solow growth model implies convergence in GDP per capita over time. This holds for some groups of countries, but not all.

Answer 1

A. According to the Solow growth model, it is not necessary that the poorer countries will always grow faster than the rich countries. The transition state is the phase that a country experience growth. If both types of countries have different characteristics in the determination of the capital labour ratio in the steady state, the poorer countries experience a slow growth.

B. The country with higher investment rate grows faster but it will last for a short term. In the long run it doesn't matter.

C. Yes. It is possible that the poorer countries may grow faster than the rich countries if the rate of depreciation, productivity, and rate of growth of population is same. The rate of accumulation of capital will be higher for poor countries, since they have low capital labour ratio.

D. The convergence in GDP per capita will occur for low income countries if they increase the investment. The marginal gain will be high.But the same amount of investment will do no good for rich countries. The return on their investment will be at a diminishing rate. But if the rich countries are continuously investing in innovations where new techniques are being produced , they will have increasing returns.