Question

What is your experience in dealing with developed or developing countries and how that maps into what the balanced growth rate, the equation g Y = g A + αg K + (1 − α)g L, and developing countries growth rate.

Answer 1

Answer :

The balanced growth equation : g Y = g A + αg K + (1 − α)g L.

The scale of technological change (g A) and the increase of the labor force (g L) are exogenous in the Solow model. That is, they are fixed outside of the  model. The growth prices of output (g Y ) and capital (g K ) are endogenous. That is, they are arranged by the economic model.

In a constant state, there is balanced growth. That is, output and capital grow in develoing countries at the same rate: consider g.

Lets.g Y = g K = g in the growth accounting equation:

Set g Y = g K = g in the equation: g = g A + αg + (1 − α)g L.

Set g Y = g K = g in the equation: g = g A + αg + (1 − α)g L.

Now ,solve for g to get: g = g A 1 − α + g L. If g A = g L = 0 (neither technology nor the labor force is developing), then g = 0. This is the case we analyzed previously

Throughout macroeconomics, a dynamic model's balanced growth rate is a line, such that all variables are increasing at a constant rate. Balanced growth is a simple assumption in the traditional exogenous growth model, whereas other variables such as capital stock, real GDP, and production per worker are on the rise. Developing economies may adopt an unbalanced growth strategy to rectify past investment decisions.