Consider a Solow economy that is on its balanced growth path. Assume for simplicity that there is no technological progress. Now suppose that the rate of population growth falls. 1. What happens to the balanced growth path values of capital per worker, output per worker, and consumption per worker? Sketch the paths of these variables as the economy moves to its new balanced growth path. 2. Describe the effect of the fall in population growth on the path of output (that is, total output, not output per worker).

Consider a Solow economy that is on its balanced growth path. Assume for simplicity that there is no technological progress. Now suppose that the rate of population growth falls. 1. What happens to the balanced growth path values of capital per worker, output per worker, and consumption per worker? Sketch the paths of these variables as the economy moves to its new balanced growth path. 2. Describe the effect of the fall in population growth on the path of output (that is, total output, not output per worker).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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9. Consider our graph of the basic Solow growth model. steady state dk y=F(() F() (-7' in LF equilibrium) On the graph above: y represents real output (or income) per worker; y-F(k) is the production function; is the capital stock per worker; s is the savings rate; 8 is the rate of depreciation of capital; 'i' represents business investment (purchases of capital) per worker); 'LF' stands for Loanable Funds. (For purposed of intuition, think of capital as 'machines.) If we started out with a capital (per worker) stock higher than the steady-state stock (above), we would expect to see which of the following happen over time? Positive growth rates while the capital stock increases. Positive growth rates while the capital stock stays less than the steady-state level. Negative growth rates while the capital stock increases. Positive growth rates while the capital stock decreases. Negative growth rates while the capital stock decreases.
9. Consider a numerical example using the Solow growth model. Suppose that F(K, N) KO.5N0.5, with d = z = 1, and take a period to be a year. (a) Determine capital per worker, income per capita, and consumption per capita in the steady state. 0.1, s = 0.2, n = 0.01, and
Consider the following Solow diagram, indicating two sep-arate savings rates, 0.2 and 0.4: Suppose the savings rate is 0.2. At the steady state, what is capital per worker? What is output per worker? How much is saved per worker? Suppose the population growth rate is equal to the depreciationrate. Solve for n and d.
The validity and ability of the Solow Growth Model in explaining the long-term growth of a country has been tested empirically.(a) In the Solow Growth Model we are introduced to the concept of the Golden Rule; optimum level of saving and capital formation to support growth. Is this Golden Rule concept proven empirically?(b) From what we have learned from the Solow Growth Model, describe some policies that can improve a country's economic growth rate.
Suppose you add a variable rate of population growth to a two-sector model of growth. Draw and properly label a graph on how the production function, investment requirement line, and saving line look like. Does the addition of the variable rate of population growth to this model help you explain anything that a simpler two-sector model with a fixed rate of growth, or a one sector model with variable population growth, cannot? Expound.
12. According to Solow's model of economic growth, what determines the growth rate of income per person for a nation that is not in its steady state? What determines the growth rate of income per person for a nation that is in its steady state? In what sense is technological progress necessary for sustained growth of income per person in Solow's model?