Link the Solow framework with real returns on capital: a. Using the Solow framework, explain why...

Link the Solow framework with real returns on capital:

a. Using the Solow framework, explain why faster population growth would increase the real returns to capital in the long-run steady state.

b. At China’s current stage of development, what are the factors that make its returns to capital so much higher than that of a mature economy such as the U.S.

Expert Solution

a. The solow framework refers to model in neoclassical economics of long run growth and this model explains the long run growth by focusing on the capital accumulation, population growth and increases the productivity by using modern technologies. According to this model, there will be no growth in the long run and if the population growth rate remains the same, the economy will be in steady state and will converge which leads to increase faster growth of economy.

Steady state in long run refers to value output per unit. The total output grows at the rate of faster population growth rate. Also, the low population growth reduces the steady state and directly affects the per capita per worker.

b. Factors that make its returns to capital so much higher than that of a mature economy such as the U.S. are:

1. Population or labor – the high rate population means that there increase in number of workers or employees and provides higher workforce. This contributes to total output value and maintain steady state in the economy. That’s why china is having more capital developing rate than that of USA.

2. Technology – the improving technology in china is the major influencing factor affecting the capital growth. This leads to increase in productivity with same rate of workforce and improves the development and growth.

3. Physical capital – china has increased investment and infrastructure, which are related to physical capital like machinery, capital, factories, roads which reduce the cost of economy and increases productivity of economy.

Rahul Sunny answered 2 years ago

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