You are given country A with a savings rate of 30% and country B with a...

You are given country A with a savings rate of 30% and country B with a savings rate of 25%. Both countries have an initial level of capital per worker worth $20,000, a depreciation rate of 10%, and an output per worker of $30,000. The labor force growth rate in country A is 3%, while in B it is 2%. Which of the two countries will grow faster? Show the calculations that will help you answer that question and explain.

Expert Solution

We are given that the savings rate in Country A > Savings in the Country B

Also, Labor Forice Growth Rate in Country A > Labor Force Growth in Coutnry B

According to the Solow Mode, the rate of Growth Rate of Total output in the long run = Population Growth Rate.

So, it can concluded that the Rate of Growth of Output in Country A > Rate of Growth of output in Country B

Also, the steady-state level of Country A will be higher than the steady-steady level of Country B because the savings are higher in A and therefore the investment curve of A = s*f(k) will be above the investment curve of B.

The poor country is therefore B and the rich country is A

Solow argues that a poor country grow faster than the rich country since it is at its initial capital stock and the law of diminishing marginal capital holds.

As country's capital per worker grows, its output growth gradually increases than at the initial where it was rising at an increasing trend.

Hencce, Country B will be growing must faster than Country A since B is left to the steady state path of A and to bring convergence, B has to grow more than A.

Rahul Sunny answered 2 years ago

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