Some data at first might seem puzzling: The share of GDP devoted to investment was similar for Country liberty and Country Techno from 1970 - 2001. However, during these same years Country Techno had a 6 percent growth rate of average annual income per person, while Country liberty had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different?

Some data at first might seem puzzling: The share of GDP devoted to investment was similar for Country liberty and Country Techno from 1970 - 2001. However, during these same years Country Techno had a 6 percent growth rate of average annual income per person, while Country liberty had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter20: Economic Growth In The Global Economy

Section: Chapter Questions

Problem 4P

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Question 1Some data at first might seem puzzling: The share of GDP devoted to investment was similar for Country liberty and Country Techno from 1970 - 2001. However, during these same years Country Techno had a 6 percent growth rate of average annual income per person, while Country liberty had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different?
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Question 1:In Ghana, the capital share of GDP is about 40 percent, the average growth in output is about2 percent per year, the depreciation rate is about 3 percent per year, and the capital–output ratiois about 1.5. Suppose that the production function is Cobb–Douglas and that Ghana has beenin a steady state.a. What must the saving rate be in the initial steady state? [Hint: Use the steady-staterelationship, sy = (δ + n + g)k.]b. What is the marginal product of capital in the initial steady state?c. Suppose that public policy alters the saving rate so that the economy reaches the GoldenRule level of capital. What will the marginal product of capital be at the Golden Rule steadystate? Compare the marginal product at the Golden Rule steady state to the marginal productin the initial steady state. Explain.d. What will the capital–output ratio be at the Golden Rule steady state? (Hint: For the Cobb–Douglas production function, the capital–output ratio is related to the marginal product…
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