Question
Suppose that the production function of a country is Y = 2K(AN) and that the savings rate, s, is equal to 20% and the depreciation
Suppose that the production function of a country is Y = 2K(AN) and that the savings rate, s, is equal to 20% and the depreciation rate, , is 10%. Further assume that the labor force increases by 1% each year and that the rate of technological progress is 6% per year. (a) Calculate the following values: i. the steady state level of capital per effective worker ii. the steady state level of output per effective worker iii. the growth rate of output per effective worker iv. the growth rate of output per worker v. the rate of growth of production (b) Suppose the labor force now increases by 5% per year. Calculate changes in the values obtained in part (a). Compare the parts (a) and (b) and comment. (c) Suppose the country suffers a technological setback and now grows by 2% per year, while the working population continues to grow by 5%. Recalculate the answers to part (b). Compare and comment on (a).
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