Question

The Solow growth model implies that, if the labor force of a country is a constant fraction of its population, ceteris paribus (a) an increase in the growth rate of the labor force has a positive effect on the growth rate of per capita income in the long run (b) an increase in the growth rate of the labor force has a negative effect on the growth rate of per capita income in the long run (c) an increase in the growth rate of the labor force has no effect on the growth rate of per capita income in the long run (d) an increase in the growth rate of the labor force sometimes has a positive effect and sometimes a negative effect on the growth rate of per capita income in the long run

Answer 1

Answer. C

In the presence of population growth(exogenous factor that cannot be controlled) , capital per worker and output per worker remain constant in the steady state situation. Since the number of workers is increasing at the rate n, total capital and total output must also grow at the same rate if a steady state situation is to be maintained.Thus, labour force as a constant fraction of population during population growth (or here, growth of labour force as a constant fraction of population) can ex­plain sustained growth in GDP. However, since GDP per worker remains constant in the steady state, population growth cannot explain im­provement in the standard of living or per capita income per worker.