Let’s think about two countries, Frugal and Smart. In Frugal, people devote 50% of GDP to making new investment goods, so γ = 0.5, and their production function is Y = √ K. In Smart, people devote 25% of GDP to making new investment goods, so γ= 0.25, and their production function is Y = 2√ K. Both countries start off with K = 100.
a. What is the amount of investment in each country this year?
b. What is the amount of consumption (GDP – Investment, or Y – I) in each country this year?
c. Where would you rather be a citizen: Frugal or Smart?