Question

Considering the Solow model, what will be the effect of an immediate doubling of the size of the labour force on GDP per capita? What is the effect in the long run?

Answer 1

Soln.

Sollow model Consider the economy in the constant scale where to increase the GDP by N% required to increase both the Capital and the labour with N%.

whereas by the given condition: any Immidiate change in the labour force in size which is 100%(Doubling the size) decreases the Capital Lbaour ratio (k)= K/L, by which the total output of the country increases but with the Less efficiency or the constant value of the growth rate may fall as it is to be considered that economy was stabize at full employment rate therefore any change in capital labour ratio decreases thhe marginal productivity of the market. Therefore percentage change in GDP is lesser than the Percentage change in labour(population) hence GDP per capita Falls.

Where as in long run this effect will be nullufy as economy restore the state of constant return and regain the effiecient capital labour ratio(k=K/L) hence GDP per capita restored to intial level with full employment level.