(a) Suppose that the country of Xanadu saves 20% of GNP, and it capital stock and GNP are estimated at $400 billion and $200 billion, respectively. The capital stock depreciate by 5% every year

(i) Using Harrod-Domer model, calculate the potential rate of growth of total GNP in Xanadu.

(ii) If the population growth rate is 3% per year and Xanadu wanted to achieve a per capita growth rate of 5% per year, what is the rate of foreign capital inflows required to achieve this get to this growth rate?

(iii) Discuss the reliability of your calculation.

(b) Output (real GDP) in the economy of Utopia has grown by 3% per year over the past 30 years. The labour force has grown at 1% per year, and the quantity of physical capital has grown at 4% per year. The average education level hasn't changed. Estimates by economists say that each 1% increase in physical capital, other things equal, raises output by 0.3%.

(i) How fast has labour productivity in Utopia grown?

(ii) How much has total factor productivity (TFP) growth (technological progress) contributed to growth?

(iii) Explain the relationship between labour productivity growth and total factor productivity growth.