Suppose that there are two countries, X and Y, which differ in both their rates of investment and their population growth rates. In Country X, investment is 25% of GDP and the population grows at 0% per year. In Country Y, investment is 5% of GDP, and the population grows at 5% per year. The two countries have the same levels of productivity, A. In both countries, the rate of depreciation, , is 10%.

a)Use the Solow model to calculate the ratio of their steady-state levels of income per capita, assuming that = 1/3.

b)What justifies assuming =1/3?

c)Draw a graph illustrating the scenario from a). Label clearly the x and y axis, as well as the key points in the graph.

d)Now calculate the ratio of their steady-state levels of income per capita, assuming that = 2/3.

e)What justifies assuming =2/3?

f)Draw a graph illustrating the scenario from d)

g)Highlight where your graph from f) differs from the graph you drew in a).