ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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A key assumption of the Solow Growth Model is that:
(a) the marginal product of capital diminishes as additional units of capital are added;
(b) output per capita declines as a nation’s capital to labor ratio increases;
(c) the marginal product of labor tends to rise as additional units of labor are added;
(d) capital tends to
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- Consider a standard Solow growth model. Denote capital stock as K, population as N, capital depreciation rate as d, saving rate as s, output as Y. Output is produced by a representative firm according to the production function Y=zF(K, N), where z is current total factor productivity. The law motion for capital is K' = (1 - d)K + I, where K' is the future capital stock. Population grows at a constant rate n, that is N' = (1 + n)N, and household supply labor inelastically, so population equals labor force. (a) In a graph, show the steady state level of capital per worker. Use lower case letters to denote per-capita terms and use * to denote steady state.(b) Suppose a country is initially at a steady state, then a war destroyed some of its capital stock. Determine the long run effects on the quantity of capital per worker and on output per worker in the steady state. Show by a graph. (C)Define golden rule saving rate. What does it maximize? Determine the effects of a decrease in the…arrow_forwardConsider a numerical example using the Solow Growth Model, for 2 countries. Country A: d=0.1, s=0.3, n=0.01, z=1, F(K,L)=K0.3n0.7 Country B: d=0.1, s=0.2, n=0.01, z=1.5, F(K,L)=K0.4N0.6 Which Country has a higher level of GDP per capita in steady state? O Country A O Country B Not enough informationarrow_forwardConsider the Solow model. Using suitable diagrams, compare the different dynamics for the levels and growth rates of capital per capita and output per capita following: (a) a new wave of immigration, (b) an increase in the saving rate, (c) a one-shot foreign investment which increase the size of the available stock of capital, (d) an important technological advance.arrow_forward
- an economy is described by the Solow-Swan model with the following variables, E(t)=1 The saving rate is 0.41 per year. Labor's share of income is 0.44. The growth rate of labor efficiency is 0.03 per year. The growth rate of the labor force is 0.02 per year Depreciation is 0.09 per year. calculate the steady-state value of the capital-to-labor ratio, K/L Enter your answer to two places after the decimal.arrow_forwardVenezuela experienced a large outow of population. Choose one scenario for the subsequent Venezuelan economy that cannot be explained by Solow model. (a) Assume that productivity is constant. If those who subsequently leave return to Venezuela, then in the long run the amount of capital will return to what it was before the population outow. (b) According to the Solow model, the capital per worker should be above it's steady state. Assuming population and productivity are xed, thereafter, capital per worker will decline. (c) Assume that productivity is constant. The level of real GDP immediately after outows is lower than the original level because of the decline in population. (d) Assuming that the population remains unchanged permanently after the population outow, even in the short term, Venezuela's growth rate will be determined solely from the growth rate of productivity.arrow_forwardThe Solow Growth Model is a model that is often used to explain the theoretical relationship between several factors that determine a country's economic growthcountry.(a) Explain what you know about the Solow Growth Model and what are the most important determinants of a country's long-term growth rate?(b) Within the framework of the Solow Growth Model, how does population growth affect a country's economic growth rate?(c) Still within the framework of the Solow Growth Model, how does technological progress affect a country's growth rate?arrow_forward
- Consider our graph of the basic Solow growth model. On the graph above: y represents real output (or income) per worker; y=F(k) is the production function; k is the capital stock per worker; s is the savings rate; δ is the rate of depreciation of capital; ‘i’ represents business investment (purchases of capital) per worker); ‘LF’ stands for Loanable Funds. (For purposed of intuition, think of capital as ‘machines.’) If we started out with a capital (per worker) stock lower than the steady-state stock ( , above), we would expect to see which of the following happen over time? Group of answer choices A) Positive growth rates while the capital stock increases. B) Negative growth rates while the capital stock increases. C) Negative growth rates while the capital stock decreases. D) Positive growth rates while the capital stock stays less than the steady-state level. E) Positive growth rates while the capital stock decreases.arrow_forwardConsider a version of the Solow growth model in which output is determined by the production function Y = z(¾½³K + ¾½N) where z = 1. The depreciation rate and the savings rate are given by d = 0.13 and s 0.3. Assume that population N grows at a rate of n = 0.02. Calculate the = steady-state output per capita and consumption per capita, y* and c*, respectively. O (y*, c*) = (0.2, 0.06) ○ (y*, c*) = (0.5, 0.35) ○ (y*, c*) = (0.5, 0.21) ○ (y*, c*) = (1.0, 0.70)arrow_forward
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