Consider the Solow growth model with population growth Other things remaining the same, assume there is unemployment in the economy, where the unemployment rate is given by u This means only (1 u) L workers get employed in a country NOTE Unemployment rate ( u ) is exogenously given Therefore the relevant Cobb Douglas Production function for any country is given by Y AK ((1 u)L) (1 ) Given the above Find the expression for y, where y Y L, output per worker (1 mark for steps and 1 mark for correct expression Marks Allotted 2 marks ) Given A, , u, n and solve for k and y in steady state, following the steps covered in class Note in this model capital dilution is measured by nk, as explained in class (For EACH of the variables 1mark for steps and 1 mark for correct expression Marks allotted 4 marks ) Now assume there are two countries i and j Both the countries have identical technology, rate of depreciation, share of capital and population growth rate However, u i u j Comparing the ratio of the output per worker at steady state between the countries, explain which country will be relatively more rich (2 marks for steps and 2 marks for explanation Marks allotted 4 marks)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 02, 2024

Consider the Solow growth model with population growth. Other things remaining the same, assume there is unemployment in the economy, where the unemployment rate is

Consider the Solow growth model with population growth.

Other things remaining the same, assume there is unemployment in the economy, where the unemployment rate is given by u.This means only (1-u) L workers get employed in a country.

NOTE: Unemployment rate (u) is exogenously given.

Therefore the relevant Cobb Douglas Production function for any country is given by:

Y=AK^*((1-u)L)^(1-)

Given the above:

Find the expression for y,where y = Y/L,output per worker.(1 mark for steps and 1 mark for correct expression: Marks Allotted: 2 marks)
Given A, , u, nand solve for kand yin steady state, following the steps covered in class. Note: in this model - capital dilution is measured by nk,as explained in class. (For EACH of the variables: 1mark for steps and 1 mark for correct expression. Marks allotted: 4 marks)
Now assume there are two countries: iand j. Both the countries have identical technology, rate of depreciation, share of capital and population growth rate . However, u_i > u_j. Comparing the ratio of the output per worker at steady state between the countries, explain which country will be relatively more rich? (2 marks for steps and 2 marks for explanation. Marks allotted: 4 marks)