Again assume Indonesia had a savings/investment rate of 30%, per capital GDP (PC
ID: 1168904 • Letter: A
Question
Again assume Indonesia had a savings/investment rate of 30%, per capital GDP (PCI) growth of 5.5% per year, a population growth rate of 1.4%, and a capital depreciation rate of 5%. But now assume that the Solow model applies. Assume no efficiency growth (that is, = 0).
(a) What would the capital productivity ratio be in Indonesia’s steady-state? Compare your result with your result in Question 3 Part (a). What does this comparison suggest about where Indonesia is in its growth process relative to it’s estimated steady-state? (b) Assume that the per capita production function is y = k = k 0.5 . Calculate the steady-state value of k, the per-capital level of capital, and the per capita income. (c) Given the assumed production function, what would the per-capita level of capital be if the productivity ratio were that which you calculated in Question 2 (a)? Verify if this is larger or smaller than the steady state.
Explanation / Answer
a) Steady state: change in K = sY - (depreciation+population growth rate) K = 0
0.3(Y) - (0.05 + 0.014)K = 0
Capital productivity ratio = Y/K = 0.064/0.3 = 0.213