Question 17 1 pts Consider the Solow growth model. Suppose you have two countrie

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Question 17 1 pts Consider the Solow growth model. Suppose you have two countries, Japan and South Korea. Looking through their very detailed statistics that both countries collect, you discover that these countries are virtually identical. You notice that both countries have the same population (N). Population grows at the same rate (gN > 0) in both countries, and everyone in the economy works (that is, population and employment are the same thing). You also notice that both countries have the same production function [Y-F(K; AN)], and the production function satisfies the assumptions of the Solow model. Both economies depreciate capital at the same rate, 8, and in both countries technology advances at the same rate (gA > 0). Both economies have the same savings rate, s. You dig deeper into the similarities of these two countries, and you discover that this year, total output in both countries is identical. You also note that both countries are in steady state. Suppose now that population growth in Japan increases. We should expect that

Explanation / Answer

When Japan reaches a new steady state, total output in Japan will grow faster than total output in South Korea.

Higher population implies higher labour force. Since labour is an input in production, increase in labor force increases total output in Japan.

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