Question

In: Economics

Explain what would happen to per-capita income in an Open-Economy Solow model as a previously closed...

Explain what would happen to per-capita income in an Open-Economy Solow model as a previously closed country with relatively high savings rates becomes an Open Economy.

Solutions

Expert Solution

The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress.

The Solow Model for an Open Economy:

An open economy characterized by the Solow model and capital that will flow into or out of the country to set the marginal product of capital, net of depreciation, equal to the world interest rate. That is: r = f '(k) – ?.

Once an economy is open, the level of capital jumps to the level determined by the interest rate. After that capital (per worker) is constant. Similarly, the wage is constant. There are still dynamics of the stock of domestically-owned assets, however. The differential equation governing their evolution is just a = s [(r +) a+ w] - (n+ g +) a whereas, High Savings Rates promote Economic Growth. Savings and economic growth have a positive correlation.


Related Solutions

In the Solow model, a change in population growth rate affects the level of per capita...
In the Solow model, a change in population growth rate affects the level of per capita income, but it has no effect on the long-run growth rate of per capita income. true or false and why
The Solow Model was originally conceived for a single-good, closed economy. In the ensuing decades, it...
The Solow Model was originally conceived for a single-good, closed economy. In the ensuing decades, it has been expanded to account for endogenous growth and free trade. We want to consider what kinds of phenomena such models should encompass. Imagine a small developing country initially with a closed economy, with income per capita well below that of advanced nations. The policymakers in this country are considering opening the country to trade. Consider this country’s initial steady state and growth, and...
What initial conditions would make it likely that a closed and open economy would fall into...
What initial conditions would make it likely that a closed and open economy would fall into a deflation trap? .
In the Solow Growth model, what happens to equilibrium (steady-state) per capita capital if people start...
In the Solow Growth model, what happens to equilibrium (steady-state) per capita capital if people start having fewer children? Draw a graph to show the effect.
Why is the GDP per capita predicted by the Solow model for several developing countries higher...
Why is the GDP per capita predicted by the Solow model for several developing countries higher than the actual GDP per capita that we observe from the data?
Show income determination in a closed economy in contrast to an open economy using the concepts...
Show income determination in a closed economy in contrast to an open economy using the concepts of income as determined by injections (like investment and exports) and leakages (like saving and imports). Discuss in words like Singapore, with a high reliance on international trade and capital flows, is an open economy.
Use the open economy macro model (the one with 3 diagrams) to illustrate what will happen...
Use the open economy macro model (the one with 3 diagrams) to illustrate what will happen if the government runs a bigger budget surplus. Answer the following: (a) (2 points) Tell me which curve or curves move. (b) (2 points) Tell me which direction the curve or curves move in. (c) (2 points) Tell me what happens to Savings in equilibrium. (d) (2 points) Tell me what happens to Investment Plus Net Capital Outflow in equilibrium.
What is saving in open economy? Discuss what are differences of saving in closed and open...
What is saving in open economy? Discuss what are differences of saving in closed and open economy?
Q1. Solow Growth Model. (10 marks) Consider the production function for a closed economy ? =2...
Q1. Solow Growth Model. Consider the production function for a closed economy ? =2 ∙ K1/2(AN)1/2 Assume that the savings rate s equals 20% and the depreciation rate ? equals 5%. Further, assume the growth rate of the labor force gN is 3% and the growth rate of technological progress gA is 2% per year. a. Find the steady-state values of (i) capital per effective worker, (ii) output per effective worker, (iii) the growth rate of output per effective worker,...
Compare the Closed-Economy IS-LM model, an Open-Economy IS-LM-BP model in which exchange rates are allowed to...
Compare the Closed-Economy IS-LM model, an Open-Economy IS-LM-BP model in which exchange rates are allowed to float freely, and an Open-Economy IS-LM-BP model in which exchange rates are held constant by the central bank. Specifically, use the three models to explain, and compare, the effects on GDP, interest, and the exchange rate of the national currency of: a. A sudden increase in government expenditures. b. A sharp increase in the discount rate and a massive sale of Treasury bonds by...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT