- (This is problem 5, page 239 of the textbook.) Two countries are identical in every way except that one has a much higher capital-labor ratio than the other. According to the Solow model, which country's total output will grow more quickly? Does your answer depend on whether one country or the other is in a steady state? In general terms, how will your answer be affected if the two countries are allowed to trade with each other?

- (This is problem 5, page 239 of the textbook.) Two countries are identical in every way except that one has a much higher capital-labor ratio than the other. According to the Solow model, which country's total output will grow more quickly? Does your answer depend on whether one country or the other is in a steady state? In general terms, how will your answer be affected if the two countries are allowed to trade with each other?

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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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…
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