4. Discuss whether, to what extent, and why the following are true or false. (Ad

Question

4. Discuss whether, to what extent, and why the following are true or false. (Adapted from Ray ch. 3, exercise 8.)

a. The Harrod-Domar model predicts that a country’s long-run per capita growth rate depends on its rate of savings, whereas the Solow model predicts that it does not.

b. According to both the Harrod-Domar and Solow models, if total factor productivity (i.e. A) is higher in one country than in another, the country with the higher productivity will see faster long-run growth in GDP per capita.

c. The Solow model predicts that a change in the population growth rate affects neither the long-run growth rate of GDP nor the long-run growth rate of GDP per capita.

d. In the Solow model, output per capita (y) goes down as capital per capita (k) increases, because of diminishing returns.

e. Both the Solow and the Harrod-Domar model point to the inadequacy of GDP per capita (i.e. y) as a measure of well-being

Explanation / Answer

(a) True.

Harrod-Domar model predicts long run per capita growth depends on savings rate, but Solow model says long run per-capital growth rate comes only from technological change.

(b) True.

(c) True.

Long run cchange in growth is effected only by technological progress.

(d) True.

Law of diminishing returns requires more and more capital to be used in order to produce the same level of output.

(e) False.

Both these models attempt to determine growth as a function of parameters like savings rate, population growth or capital depreciation. They don't attempt to point to inadequacy of per capita GDP.

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