Question 5

In Gondouana, the share of capital in GDP is about 30%, the average annual growth of GDP is 3%, the depreciation rate of 4% and the capital-to-production ratio is 2.5. If the production function is of the Cobb-Douglas form and if the Gondouana is in stationary state:

1. What should be the savings rate in the initial steady state? (An indication: use the stationary state relationship: sy = (8 + n + g)k)

2. What is the marginal productivity of capital in the stationary state?

3. Suppose a policy inducing an increase in the savings rate allowing the Gois economy to reach the volume of capital dictated by the golden rule. What happens to the marginal productivity of capital? Compare this productivity to the one that prevailed in the stationary state. To explain

4. What is the capital-production ratio corresponding to the steady state dictated by the golden rule?

5. What is the savings rate to reach the steady state dictated by the golden rule?