1960 were very similar countries in many respects. Both were relatively poor with GDP per capita of about $1500 (about 10% of the U.S. level at that time). In both countries about half of the population was working and only very few were college educated.

Between 1960 and 2010 however, the paths of South Korea and the Philippines diverged dramatically. In the Philippines, per capita GDP grew at about 1.6% per year. In contrast, South Korea became one of the world's fastest growing economies, with growth of about 6% per year. By 2010, per capita GDP in South Korea stood at $26000 whereas in the Philippines per capita GDP was only $3200.

Up to 1960, South Korea and the Philippines had a very similar investment rate of about s = 0.15. But between 1960 and 1980, South Korea's savings rate increased to about s = 0.4 and has stayed at this new high level from 1980 onwards whereas in the Philippines, the savings rate remained at s = 0.15.

They also share the sameconstantcapital depreciation ratedand the sameconstantemployment to population ratioe.Assume that production in both countries follows a Cobb-Douglas function: Y = AK^(1/3)L^(2/3).

i) (3 points)Describe how the Solow diagram changes whenonlythe savings rate increases.

ii) (4 points)Describe how the Solow diagram changes whenonlythe TFP increases.

iii) (8 points)Can the difference in the savings rate only explain why per capita GDP in 2010 in South Korea is more than 8 times higher than in the Philippines ($26000/$3200 = 8.125)?Use the steady state solution of GDP per capita of the Solow model to justify your answer. Use your answers to question as well to support your arguments.