Sweden and Norway are two neighboring countries in Northern Europe with similar savings rates, population growth rates, technology growth rates, and depreciation rates. However, Norway differs from Sweden in that Norway has large deposits of oil all along its coast, which makes it very easy for Norway to produce large quantities of crude oil every year with relatively little capital and labor. a) Draw a Solow Growth diagram that compares Sweden and Norway. What is the main difference between the two countries in the diagram? b) According to the Solow Growth Model, which country would have a higher standard of living in the long run? Which country would have a higher growth rate of its standard of living in the long run
Sweden and Norway are two neighboring countries in Northern Europe with similar savings rates, population growth rates, technology growth rates, and depreciation rates. However, Norway differs from Sweden in that Norway has large deposits of oil all along its coast, which makes it very easy for Norway to produce large quantities of crude oil every year with relatively little capital and labor. a) Draw a Solow Growth diagram that compares Sweden and Norway. What is the main difference between the two countries in the diagram? b) According to the Solow Growth Model, which country would have a higher standard of living in the long run? Which country would have a higher growth rate of its standard of living in the long run
Chapter8: Productivity And Growth
Section: Chapter Questions
Problem 2.4P
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Sweden and Norway are two neighboring countries in Northern Europe with similar savings rates, population growth rates, technology growth
rates, and depreciation rates. However, Norway differs from Sweden in that Norway has large
deposits of oil all along its coast, which makes it very easy for Norway to produce large
quantities of crude oil every year with relatively little capital and labor.
a) Draw a Solow Growth diagram that compares Sweden and Norway. What is the main
difference between the two countries in the diagram?
b) According to the Solow Growth Model, which country would have a higher standard of
living in the long run? Which country would have a higher growth rate of its standard of
living in the long run?
c) Suppose now that, in the long run, oil becomes obsolete and has no value because it is
uneconomical relative to renewable energy sources like solar and wind power. What would
this do to your Solow Growth diagram in part a? How would the standard of living in
Norway and Sweden compare in the long run in that case?
Answer correctly with explanation
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