Suppose that in Country 1 the growth rates of multifactor productivity (a), capital (k), and labor (h) are 2.5, 3, and 1 percent per year, respectively, and that capital’s share of output (b) equals 0.25. Initially output per hour equals 40 in Country 1 and 10 in Country 2.
(a) Calculate the labor productivity growth rate in Country 1.
(b) Calculate output per hour in Country 1 at the end of ten, twenty, and thirty years.
(c) Suppose that the labor productivity grows four times as fast in Country 2 as it does in Country 1 for the first ten years, three times as fast for the second ten years, and twice as fast for the third ten years. Calculate output per hour in Country 2 at the end of ten, twenty, and thirty years.
(d) Calculate Country 2’s output per hour as a percentage of Country 1’s output per hour at the end of ten, twenty, and thirty years. Are these calculations consistent with the predictions of the Solow growth model?