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2. Solow Growth Model and Convergence. Mexico and Guatemala are two neighboring countries inNortthentral America. Given that they have similar geographic locations and access to
2. Solow Growth Model and Convergence. Mexico and Guatemala are two neighboring countries inNortthentral America. Given that they have similar geographic locations and access to the same technologies, let's assume that their technology growth rate g, depreciation rate 5, and production mction fi) are the same. a] A major dierence between Mexico and Guatemala is that the national savings rates a in the two countries are dierent: in Mexico, the savings rate is about 22 percent, while in Guatemala it is lower, only about 5 percent. According to the Solow growth model (with technology growth and population growth], which country should have a higher standard of living in the long run, Mexico or Guatemala? {Assmne that these savings rates are constant over time and that the population growth rates in the two countries are the same.) Draw a diagram to help illustrate your answer. b] Contrary to what we assumed in part a, above, the population growth rate in Guatemala is actually higher than in Mexico: about 2.2%a'yr in Guatemala vs. 1.6%a'yr. in Mexico. Suppose that the savings rates 3 in the two countries is equal. According to the Solow growth model {with technology growth and population growth), which country should have a higher standard of living in the long run in this case? Draw a diagram to help explain your answer. c] Suppose that the U.S. has the same savings rate and population growth rate as Mexico in the long run (and also the same g, E, and f(k)). The standards of living in Mexico and Guatemala are currently lower than in the U.S. Should we expect the standards of living in Mexico and in Guatemala to converge to that of the U.S. in the long run'? Briey explain why or why not
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