In an economy, output, Y, is produced using physical capital, K, and human capital, H, according to the following production function:

where A_t+1 = A_t(1 + g), g = const. Individuals devote a constant fraction of their

time, u, to learning (they do not work while learning) which leads to the accumulation

of human capital. Assume that human capital is accumulated according to

where L_t is unskilled labour (L_t+1 = L_t(1 + n), n = const). The law of motion of

physical capital is

a) Write the model in intensive form and find the steady state values of variables.

b) Consider the following data (hats denote values relative to the U.S. value).

c) Consider two extreme cases: (1) the 1990 TFP ratios are maintained, and (2) the

TFP levels converge completely. For each case, which economy will grow fastest

in the next decade and which slowest? Why?

Yt=Kt(AtHt)1 Ht=euLt,>0 Kt+1=sKYtKt Assume that g+=.075,=1/3, and =.10 for all countries. What are the the steady-state incomes of these economies, relative to the United States? Yt=Kt(AtHt)1 Ht=euLt,>0 Kt+1=sKYtKt Assume that g+=.075,=1/3, and =.10 for all countries. What are the the steady-state incomes of these economies, relative to the United States