Question

Banana Republic is a country with the rate of depreciation of capital 15% per year, the population growth of 3% a year, and the growth rate of technology 4% a year.

1. The annual growth rate of "effective labor" in this economy is

2. The level of investment needed to maintain a constant capital stock (K) in this economy is

3. The level of investment needed to maintain the economy at the steady-state is

4. The steady-state growth rate of income in this economy is

5. The steady-state growth rate of income per worker in this economy is

Answer 1

Rate of depreciation of capital= 15%

Rate of population growth(n)= 3%

Rate of technological progress(g)= 4%

(1) Rate of growth of "Effective labour" wil be n+g because the labour in period T+1 will be (1+n) times labour in period T and the technology in period T+1 will be (1+g) times the technology in period T. So, the growth of Effective labour will be n+g= 3% + 4%= 7%.

(2) The level of investment is

Hence, The level of investment needed is 0.2212 times the per capita effective labour capital stock.

(3) The same as in part (2)

(4) The steady state growth rate of income in this economy is n+g= 7% which is also known aa the aggregate growth.

(5) The steady state growth rate of income per worker is g= 4%