Question

1. Imagine that you are hired by the president of the country of Bogatya as an economic adviser. Currently the country is enjoying a constant but comfortably high standard of living. However, the neighboring country of the Republic of Orania is extremely poor. a. Your initial analysis of the economic data from the region leads you to discover that Bogatya has a much higher level of total factor productivity (A) than Orania but otherwise the two countries seem very similar (that is, all the other parameters of the model – variables with bars - are the same in the two countries, including population sizes L. Use the Solow model diagram to show the steady state equilibria of both economies (both can be on one graph). Which one of them will have more capital? b. Which economy will have a higher GDP per capita? Why? c. A proposal is considered whereby a large number of people were allowed to resettle from Orania to Bogatya. First consider which parameter (i.e. exogenous variable, those with a bar) will change and in what way in the two countries. Use the Solow diagrams for both countries to show the effect of this policy on the equilibrium capital stock. d. The President of Bogatya asks you what the impact of this policy will be on the standard of living in the two countries. Recall that the steady state level of capital is given by SĀ3/2 K* =(3) L and GDP per capita is given by y= Ak??.Draw the time path of GDP per capita in the two economies showing what happens when the policy is implemented. HINT: For each economy, after the labor is moved, does the steady state level (i.e. the equilibrium level) of total capital K* change? If so, how? How about the steady state level of capital per person k=K/L, does it change? Now that you've

Answer 1

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