Country S and Country T are two similar countries with the same working population equal to 100. Firms use the following production technology: Y= AK*N(1-») Where A is the TFP and it is set to 10, while a=0.5. In both countries, capital depreciates at a rate of 8=10% per period, but while the population in country S is stable over time, the population growth in country Tis 10% per period. a. Find the minimum level of investment per capita necessary at time t to raise the level of capital per capita in time t+1, knowing that both countries start with 1000 capital at time t. b. Suppose that in both countries, citizens save 10% of their income every year. Compute the long-run steady state equilibrium: What will be the output per capita? Which country will experience more economic growth in per capita terms? And in absolute terms? c. Once the countries reach their steady state, what will happen to economic growth? How can government achieve long-run growth? TIP: Answer to this question, using the parameters of the model, but also using the historical evidence seen in class on the determinants of long- run growth.

Country S and Country T are two similar countries with the same working population equal to 100. Firms use the following production technology: Y= AK*N(1-») Where A is the TFP and it is set to 10, while a=0.5. In both countries, capital depreciates at a rate of 8=10% per period, but while the population in country S is stable over time, the population growth in country Tis 10% per period. a. Find the minimum level of investment per capita necessary at time t to raise the level of capital per capita in time t+1, knowing that both countries start with 1000 capital at time t. b. Suppose that in both countries, citizens save 10% of their income every year. Compute the long-run steady state equilibrium: What will be the output per capita? Which country will experience more economic growth in per capita terms? And in absolute terms? c. Once the countries reach their steady state, what will happen to economic growth? How can government achieve long-run growth? TIP: Answer to this question, using the parameters of the model, but also using the historical evidence seen in class on the determinants of long- run growth.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Country S and Country T are two similar countries with the same working population equal to 100.
Firms use the following production technology:
Y= AK*N(1-»)
Where A is the TFP and it is set to 10, while a=0.5.
In both countries, capital depreciates at a rate of 8=10% per period, but while the population in
country S is stable over time, the population growth in country Tis 10% per period.
a. Find the minimum level of investment per capita necessary at time t to raise the level of
capital per capita in time t+1, knowing that both countries start with 1000 capital at time t.
b. Suppose that in both countries, citizens save 10% of their income every year. Compute the
long-run steady state equilibrium: What will be the output per capita? Which country will
experience more economic growth in per capita terms? And in absolute terms?
c. Once the countries reach their steady state, what will happen to economic growth? How can
government achieve long-run growth? TIP: Answer to this question, using the parameters of
the model, but also using the historical evidence seen in class on the determinants of long-
run growth.

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