Question

suppose there are two economies A and B that are identical in all aspects except A has higher level of total factor productivity. If both economies currently have the same standard of living and lie below the steady state, which economy is growing faster? Explain using graph from solow model to support your answer

Answer 1

Increase in the total factor productivit implies an increase in the technological progress of a country.

It is given that total factor productivity in A > total factor productivity in B

Now, in the solow model, the Growth Rate of Income = n + g

Higher total factor productivity implies higher g and hence higher growth rate of income

So, at steady state, ( n + g) in country A is more than the ( n + g) in country B

It can, therefore, be concluded that the Country A grows faster than Country B

Higher total factor productivity shifts the investment curve upward from sf(k) to s1f(k1) leading to higher steady state at k2* as shown in the figure below:

Country B is at point E1 and country A is at E2 (higher steady state)

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