Question

α=alpha

Y=per capita (Real GDP or GDP)

N=population

K=capital

in class, we derived a relationship between output per capita y=Y/N and the population N in an economy as y=(φ^1-α)(K^α) / N^α. For each of the following scenarios describe

in words how you would depict that in terms of the variables in the model. You do NOT have to draw any diagrams just use words.

a) A war that creates immense death and destruction in an economy.

b) A broad-based immigration policy that cuts off the flow of foreign workers entering the economy and accelerates the removal of workers in the domestic economy.

c) A closed-off economy, like Cuba or North Korea, normalizes relationships with the rest of the world.

d) A new leader institutes a set of policies that reduce population growth, open the economy up to foreign investment, encourages more subsistence farmers to enter the labor force and encourages women

Answer 1

The relationship between output per capita y = Y/N and the population N is given as:

y = ()*(K)/N

a) A war creates immense death and destruction in an economy.

=> This reduces the population(N) as well as the capital(K) in the economy. With both factors reducing the output per capita(y) decreases.

b) A broad-based immigration policy that cuts off the flow of foreign workers entering the economy and accelerates the removal of workers in the domestic economy.

=> This reduces only the population of the economy and it increases the output per capita(y) for the domestic economy.

c) A closed-off economy, like Cuba or North Korea, normalizes relationships with the rest of the world.

=> This enhances the trade opportunities with the rest of the world and hence the output per capita(y) increases.

d) A new leader institutes a set of policies that reduce population growth, open the economy up to foreign investment, encourages more subsistence farmers to enter the labor force and encourages women.

=> The labor force decreases due to a reduction in population growth but again increases as it encourages women to work. The foreign investment increase the capital in the economy. So, both the population and the capital increases causing the output per capita(y) to increase.