Question

1. According to the Solow growth model, will all countries eventually converge to the same level of real wealth? Why or why not? Suppose there are two countries, A and B. If the exogenous savings rate is higher in country A than in country B, does this mean that the steady state level of income is higher than country A? Why or why not?
2. Explain how the Smoot-Hawley Tariff act is thought to have worsened the severity of the Great Depression. Why did politicians initially think this would help the economic situation?

Answer 1

1. If countries have the same g (population growth rate), s (savings rate), and d (capital depreciation rate), then they have the same steady state, so they will converge, i.e., the Solow Growth Model predicts conditional convergence. Along this convergence path, a poorer country grows faster.

Countries with different saving rates have different steady states, and they will not converge, i.e. the Solow Growth Model does not predict absolute convergence.

absolute convergence between countries or regions occurs depends on whether they have similar characteristics, such as education policy...institutional management , trade policy, market operations, etc.

2.When saving rates are different, growth is not always higher in a country with lower initial capital stock.

3.Smoot-Hawley raised already high U.S. tariffs on foreign agricultural import The purpose was to support U.S. farmers who had been ravaged by the Depression. Instead, it raised food prices. It also compelled other countries to retaliate with their own tariffs. That forced global trade down by 65%.