In solow growth model, suppose that the per-orker production function is given b

Question

In solow growth model, suppose that the per-orker production function is given by y = zk0.3 with s = 0.25, d = 0.1 and n= 0.02.

a) Suppose that in country A, z= 1. Calculate per capita income and capital per worker.

b) Suppose that in country B, z=2. Calculate per capita income and capital per worker.

c) As measured by GDP per capita, how much richer is country B than country A? What does this tell us about the potential for differences in total factor productivity to explain differenes in standards of living across countries?

Explanation / Answer

In solow growth model steady state arises when:

sf(k)= (n+d)k

a) If z=1, y=0.3k

y/k = 0.3

b) If z=2, y=0.6k

y/k = 0.6

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