The amount of education the typical person receives varies substantially among c

Question

The amount of education the typical person receives varies substantially among countries. Suppose you were to compare a country with a highly educated labor force and a country with a less educated labor force. Assume that education affects only the level of efficiency of labor. Also assume that the countries are otherwise the same: they have the same saving rate, the same depreciation rate, the same population growth rate, and the same technological progress. Both countries are described by the Solow model and are in their steady states. What would you predict for the following variables?

a.) The rate of growth of total income.

b.) The level of income per worker.

c.) The real rental price of capital.

d.) The real wage.

Show how you got the answer and explain.

Explanation / Answer

a.) The rate of growth of total income - as the other two components, labor and capital, are same for both nations, total income will be higher for country with higher education. b.) The level of income per worker - will be higher for country with higher education because total income is higher c.) The real rental price of capital - higher for country with higher education because same capital handles larger income d.) The real wage - higher for country with higher education because higher income is distributed among same number of labors.

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