I. In the island nation of Westfall, households save 10% of their income at all
ID: 1139273 • Letter: I
Question
I. In the island nation of Westfall, households save 10% of their income at all times. The economy is closed to foreign trade or international borrowing or lending. The small island is home to 1 million people/workers (for your calculations plug in a value of 1). Production takes place using the aggre the standard notion from class. As if by magic, the government spends nothing and taxes nothing gate production function given by Y = KLi-a, where we followed (a) What is the rate at which capital machinery depreciates, if in the long run, absent any shocks or disturbances, the ratio of capital to output is 4? (b) What is the level of productivity, also known as "total factor productivity," in Westfall if the long-run level of output per capita is 2 and two thirds (2/3) of income is paid as wages? (c) Use all previously supplied information and your answers to compute the steady state level of the capital stock. What is the wage rate? What about the rental price of capital? (d) Unexpectedly, the people of Westfall receive a gift of 2 new units of capital (machinery) from a foreign country. Use the main Solow diagram and time plots to describe the short- run and long-run consequences of this gift for the stock of capital in Westfall and for the wage rate. (e) Many years later, once the consequences of this initial gift have worked themselves out the economy of Westfall is again steady. They now receive a second gift from the helpful foreigners: a new production technique, knowledge of a technology that will increase the level of total factor productivity by 15%. Use the Inain Solow, diagrann and time plots t describe the evolution of the capital stock, total output, and the wage rate, following this shock. Compute or approximate the percent change in the wage rate between the old and new steady state. How does it compare to the percent change in productivity? Briefly explain. (1) Explain briefly, why all growth eventually stops in the Solow model (that is, when growth is driven by capital accumulation alone). Hint: what happens if you add more capital? There are two “forces" in effect, what is the next result?Explanation / Answer
F) in solow growth model output per capita eventually stops growing because of diminishing marginal product of capital .
The economic growth can comes about from saving and investment . The diminishing marginal returns to capital accumulation adding extra amount of capital gives progressively smaller and smaller increases in output .
The output can depend on capital with diminishing returns . Diminishing marginal returns is probably be able to increase it's output . The solow model does not attempt to model the consumption saving decision . Instead it assume that consumer save a constant fraction of their income.