Solow Model
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Essay Questions: Please answer BOTH of the following essay questions.
- (25 points) Answer the following question about immigration using the Solow Model. As usual, assume output is produced with the production function Y = AKαL 1−α. Capital depreciates at the rate δ and productivity, A, is assumed constant. The savings rate, s, is also constant.
- Assume the economy is initially in the steady state with constant population growth, n. Depict this steady-state equilibrium in a graph. Remember to label your curves and axes.
- Given the way you have drawn the model, is consumption being maximized? Why or why not?
- Suppose there is a one-time increase in the capital stock (e.g. an aid package from the World Bank). Using your previous graph, illustrate the effect of this on the economy in the short and long-runs. What happens to output per person, capital per person, investment and savings in the short and long-runs?
(25 points) Assume a standard Cobb-Douglas production technology. Using what you know about growth accounting and the information in Figure 1, answer the following questions.
Figure 1
- Calculate total factor productivity growth for each country.
- In the steady state of the Solow Model including education, total factor productivity, capital, and labor, what is the rate of growth of output per capita?
- Combining your answers to A and B, what country in Figure 1 was most distressed by these numbers and why?
