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5. Consider the Solow growth model with population growth and growth in the efficiency of labor. Suppose that 2 countries A and B have
5. Consider the Solow growth model with population growth and growth in the efficiency of labor. Suppose that 2 countries A and B have the same production function given by Y=K (LE)5, the same depreciation rate of physical capital (= 0.03), the same rate of growth of E (g = 0.02), and the same initial level of E, Eo 1. The saving rate in country A is 0.6 and its population growth rate is 3%. The saving rate in country B is 0.4 and its population growth rate is 1%. = (a) Compare the steady-state levels of output per effective worker of these two coun- tries. (b) Assuming that the economy begins at the steady state (or balanced growth path), calculate output per capita in period 0 for each country. Draw the balanced growth paths for these two countries on the same graph (have log of output per capita on the y-axis and time on the x-axis. (c) Assume now that at time 0 country A is below the steady state and country B is above the steady state. Draw on the same graph log of output per capita for these two countries as a function of time starting in period 0 and show how they converge to their balanced growth paths. (d) Do these countries converge to each other in output per capita? Defend your answer.
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