In the early 1980s, Brazil and South Korea had similar saving rates ( around 17%
ID: 1230999 • Letter: I
Question
In the early 1980s, Brazil and South Korea had similar saving rates ( around 17%) and similar levels of income per capita ( around $6,000 in 1996 dollars). In the 1980-2000 periods, the average Brazilian saving rate stayed around 17%, whereas the Korean saving rate increased to more than 30%.A. Use the Solow model to predict the effects on the steady-state income per capita for both countries (assuming their efficiency gains were exactly the same) and compare.
B. In 2000, income per capita was $7,190 in Brazil and $15,876 in Korea. Is this consistent with your predictions?
Explanation / Answer
In Solow's model the there are flexible prices,wages and interest rates . At the steady state; sy=nk where s=marginal propensity to save y=income/output per capita n=rate of growth of population/labor k=capital per unit of labor/per capita capital A. savings rate=marginal propensity to save=s In the early 80's for Brazil s=17%=0.17 , y=$6000 for Korea s=17%=0.17, y=$6000 therefore for steady state in Brazil sy=nk 0.17*6000=nk 1020=nk same is for Korea now during 1980's to 2000 Brazilian savings rate stayed around 17% whereas Korean rate has been increased above 30% therefore for Brazil steady state income-per capita y=nk/s =1020/0.17=$6000 for korea steady state income-per capita y=nk/s y=1020/.30 y=$3400 hence on comparing the two countries the steady state income-per capita y for korea has declined but had remained constant for Brazil. B. In 2000 income-per capita y for Brazil was $7190 which is close to $6000 can be considered but steady state income-per capita y for Korea $15876 which is not consistent with our predictions of $3400.