Plots of real GDP per capita, real gross fixed investment per capita, and popula
ID: 1230170 • Letter: P
Question
Plots of real GDP per capita, real gross fixed investment per capita, and population growth rates over the period from 1950 -2007 for six countries, Canada, the UK, the US, China, Japan and Singapore have been posted on the class website.
Write the appropriate equations of the Solow growth model and provide explanations of the trends and changes in trends (if any) of real GDP per capita in these countries. You should focus on the following.
i) Possible movements toward the steady state (particularly in the initial years after the destructions of World War II)
ii) Possible effects of changes in the savings rate
iii) Possible effects of changes in the population growth rate
iv) Possible effects of technological development
Note:
i) There is no one correct answer to this question. But your explanations should be clear and based on the results of the Solow growth model.
ii) Since data on GDP per worker and investment per worker are not readily available, assume that GDP per capita and investment per capita are good approximations.
iii) If there are missing observations, such as for China, then you should provide explanations only for those observations the plots of which are visible.
iv) It should not concern you if the variables are measured in different currency units. Only the trends or changes in trends are relevant for answering this question.
Explanation / Answer
Comparative advantage was first described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal.[4] In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.