Question

You are asked to make comparisons of two pairs of countries. The first pair are the Latin American countries of Chile and Argentina; the second pair are France and Germany. You are given the following information:
The average saving rate in Argentina is 23.3 percent, in Chile it is 28.7percent, in France it is 21.1 percent, and in Germany, 20.8 percent.
(a) Assuming the countries are identical in every other way, which country would the Solow model predict to have the higher per capita real GDP?
(b) You find out the steady state real per capita GDP in each of the countries is $13, 300 in Argentina, $12, 500 in Chile, $31,300 in France, and $34,000 in Germany. What is the primary factor that the simple Solow model uses to describe these differences? Give an example

Answer 1

Answer:

Part a: According to Solow model higher per capita real GDP will be in Chile because of its highest saving rate.

Part b: The per capita capital stock or the labour ratio is the primary factor for these differences in the simple Solow model.

Explanation:

Part a:

According to Solow model higher per capita real GDP will be in Chile because of its highest saving rate.

In Solow model the GDP per capita is defined as

                                           $y=k^{\alpha}=f(k)$

Also the steady state path is given as

$sf(k)=(s+n)k\\\frac{s}{s+n}=\frac{k^*}{f(k^*)}\\\frac{s}{s+n}=\frac{k^*^{\alpha-1}}{k^*}\\\frac{s}{s+n}={k^*^{\alpha-2}}$

As all other parameters are same thus the country with higher value of s will have a higher per capita GDP.

According to the Solow model, higher saving rate means larger capital stock and high level of output at the steady state.

Higher saving rate leads to faster growth in Solow model. So there is higher per capita real GDP for the country that has higher saving rate.

Part b:

In Simple Solow Model, the steady state per Capita GDP, $y^*$ is the function of the steady state per capita capital stock given as $k^*$

Now this indicates that

$y^*=f(k^*)$

where f is an increasing concave function i.e. f'>0 and f''<0

Thus the sole dependence of per capita GDP is on per capita capital stock.

Thus the per capita capital stock or the labour ratio is the primary factor for these differences in the simple Solow model.

Answer 2

Answer:

the Solow model will predict CHILE to have the higher per capita real GDP.

the primary factor that the simple Solow model use is CAPITAL. For example In 2018, capital investment was $3,652.2 billion for a capital contribution of 17.82%

Explanation: the solow model predict Chile to have higher per capital real GDP because Chile has the highest percentage of average saving rate among the four countries.

Capital is one of the factors in the growth accounting factor introduced by Robert solow in 1957.