Question

Bradford DeLong was the first to show that there is no significant evidence of countries’ levels of GDP per capita converging, nor of their growth rate. The first problem could easily be fixed within the Solow/Swan framework by adding additional factors of production such as human capital. Explain why such differences could explain differences of well-being (in terms of the model).

Answer 1

Differences in the nation's well-being is measured on the basis of its income per capita or income per worker. A country that has higher income per capita is considered as an advanced nation with better well-being

Solow Model gives an explanation of the country's differences using the concept of human capital in country's production function

Let Production Function, Y = F(K, EL)

where E denotes changes in the human capital

Steady state variables are in efficiency terms.

One source of rise in human capital is the rise in the level of education. Let stock of Education be E.

In the solow model, the rate of growth of income = n+g which is independent of growth in human capital stock. So, two countries have the same growth in income given that they have same n and g.

Now, output per effective unit of labor is defined as y* = Y/LE

where E denotes the human capital index

y* will be same in two countries.

However, y* = Y/LE

> Y/L = y*E

where Y/L = output per worker

If country 1 stock of human capital > country 2 stock of human capital, then E1 > E2

Therefore, y*E1 > y*E2

(Y/L)1 > (Y/L)2

It can be concluded that output per worker will be higher in a country who has higher stock of human capital.

So, the differences in the stock of human capital could explain the difference in the output / income per worker of two countries.

Income per worker here is taken as a measure of country's well-being.