1. What does the term s*Y represent in the capital-accumulation equation of Solow growth model?
a) The labor-income share of GDP.
b) Net investment.
c) Gross investment.
d) The net change in the capital stock from one year to the other.
2. In the Solow growth model, suppose that the savings rate is 25%, the depreciation rate is 10%, the current capital stock is 10 trillion $ and current output of a country is 4 trillion $. What will the capital stock of this country be in the following period?
a) 10 trillion $.
b) 11 trillion $.
c) We cannot tell since we are not given information about technological progress.
d) We cannot tell since population growth is not known.
3. Consider a country which starts with a capital stock below its steady-state level in the Solow model (without technological change). Why is growth slowing down over time for this country?
a) Population growth is becoming stronger over time since the population is growing, which makes it harder to accumulate high levels of capital per capita.
b) A country cannot maintain the same savings rate forever, so investment must decrease at some point.
c) The more capital there is, the more of it depreciates. As the country becomes richer, it becomes ever harder to replace depreciated capital.
d) There are diminishing returns to the factor capital. Thus investment, capital and GDP per capita grow by ever smaller amounts as the country becomes richer.
4. Suppose Pakistan has a higher savings rate than Iran. Both start out with the same capital per worker. All other parameters are the same for both countries (population growth and depreciation rate). The Solow growth model (without technological change) predicts that...
a)
1. What does the term s*Y represent in the capital-accumulation equation of Solow growth model?
a) The labor-income share of GDP.
b) Net investment.
c) Gross investment.
d) The net change in the capital stock from one year to the other.
2. In the Solow growth model, suppose that the savings rate is 25%, the depreciation rate is 10%, the current capital stock is 10 trillion $ and current output of a country is 4 trillion $. What will the capital stock of this country be in the following period?
a) 10 trillion $.
b) 11 trillion $.
c) We cannot tell since we are not given information about technological progress.
d) We cannot tell since population growth is not known.
3. Consider a country which starts with a capital stock below its steady-state level in the Solow model (without technological change). Why is growth slowing down over time for this country?
a) Population growth is becoming stronger over time since the population is growing, which makes it harder to accumulate high levels of capital per capita.
b) A country cannot maintain the same savings rate forever, so investment must decrease at some point.
c) The more capital there is, the more of it depreciates. As the country becomes richer, it becomes ever harder to replace depreciated capital.
d) There are diminishing returns to the factor capital. Thus investment, capital and GDP per capita grow by ever smaller amounts as the country becomes richer.
4. Suppose Pakistan has a higher savings rate than Iran. Both start out with the same capital per worker. All other parameters are the same for both countries (population growth and depreciation rate). The Solow growth model (without technological change) predicts that...
a)
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By manipulating the equations of the Solow model mathematically, it is possible to make more precise quantitative statements about the behavior of growth rates over time. For example, one way of qualifying the principle of transition dynamics is with the following equation.
g = 3 X (ln y* - ln y0) + 2
where g denotes the growth rate of a country over the next 10 years (in percentage points), 1n denotes the natural logarithm, y0 is the per capita GDP of a country in a steady-state (relative to the United States).
Of course, we don't usually know a country's steady-state position vis-Ã -vis of the United States. However, we do observe its growth rate. This question asks you to consider the facts from recent growth experiences in the table below.
| Country | Current rate | Steady-state | g |
| United States | 100 | 2 | |
| Ireland | 86 | 4 | |
| Russia | 21 | 5 | |
| Brazil | 17 | 2 | |
| China | 7 | 9 | |
| India | 5 | 6 | |
| Ethiopia | 1 | 5 |
Per capita Growth rate Per capita
GDP (US = 100), during GDP (US = 100),
Country 2010 2000-2010(%) steady state
The United States 100 2.0
Ireland 86 4.0
Russia 21 5.0
Brazil 17 2.0
China 7 9.0
India 5 6.0
Ethiopia 1 5.0
(a) Using those facts and the equation above, fill in the last column of the table. That is, offer a projection of where countries are headed in the long run.
(b) Provide a one-paragraph discussion of your results.
