Question

A country has a savings rate of 10%, a population growth rate of 3%, depreciation rate of 1% and a technology growth rate of 2%.  What is the long-run growth rate of total income per capita according to the Solow model?

Group of answer choices

2%

7%

3%

we do not have enough information to calculate the long-rung growth rate

Answer 1

Ans)- Given,

Savings rate (s) = 10% , population growth rate(n) = 3% , technology growth rate (g) = 2%

Solow model predicts that in the long-run, the economy will reach at the steady state level where growth rate of per effective output will be zero.

i.e.

Where, log represents growth rate

Y: output

L: Labor/Worker

E: Technology/effectiveness

EL: no. of effective labor

Y/L : output per worker

Y/EL: Output per effective worker

So,

Hence, here 1^st option is correct. i.e. the long-run growth rate of total income per capita according to the Solow model would be 2%.