Suppose two countries, A and B, with the same production function Y = KαL 1−α . The value of α is 0.30, the growth rate of population is 2% and the depreciation rate is 5%. a) Show that with price-taking firms the share of labor must be 1 − α. b) Compute the stock of capital, output and consumption per unit of labor in the steady state if the savings rates were 25% for country A and 35% for country B. c) Compare both economies to the Golden Rule. d) Explain what would happen to both countries if suddenly their savings rate became the Golden Rule savings rate.

Suppose two countries, A and B, with the same production function Y = KαL 1−α . The value of α is 0.30, the growth rate of population is 2% and the depreciation rate is 5%. a) Show that with price-taking firms the share of labor must be 1 − α. b) Compute the stock of capital, output and consumption per unit of labor in the steady state if the savings rates were 25% for country A and 35% for country B. c) Compare both economies to the Golden Rule. d) Explain what would happen to both countries if suddenly their savings rate became the Golden Rule savings rate.

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 5P

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