Development Economics

Assignment 2

Ans 1) The change in income is denoted as “ sy-(n+d)k “ in the Solow model. Equations used in Solow Growth Models are:

• Sy : It indicates the Savings
• (n+d)k : It indicates nk as the reduction in capital per worker due to an increase in population and dk as the reduction in capital per worker due to depreciation

An increase in Population will have the following effect on the growth rate of capital per worker; the growth rate (y4) of capital per worker will decline due to increase in population: [pic 1]

[pic 2]

A subsequent increase in savings rate will then increase the growth rate (y’) of capital per worker; the growth rate would still be less than the initial one but more than y4 as indicated at D  

Ans 2 a)[pic 3]

b)[pic 4]

The growth rate of output per workers is higher after this because it caused more destruction.

c)[pic 5]

Ans 3 a) In solow Growth Model sY = (n+d)k [pic 6]

Y = (n+d)k/s
Y = (0.03+0.02)*2/0.5
Y = 0.2

b) When n=0.05 
    Y= (0.05 +0.02)*2/0.5
     Y= 0.28

Ans 4) High level equilibrium exists in an economy when there is positive assortment of inputs in production. That is; high skilled inputs are grouped with other high skilled inputs and low skilled inputs are grouped with low skilled inputs. Low level equilibrium in an economy exists when high and low level inputs are grouped together, which results in a worse of output for the economy. This phenomena is explained by the following equation:  (qh)^2 +(ql)^2 > 2qhql

Ans 5) There is a direct relationship between the savings rate and economic growth in the countries listed (keeping all other things constant.) That is, as the savings will grow, more investment will be injected, aiding capital formation in the country and therefore paving way for economic growth (and vice versa for economies with low savings) [pic 7]

Source:https://data.worldbank.org/indicator/NY.GNS.ICTR.ZS?end=2016&start=2016&type=shaded&view=map&year=2015&year_high_desc=false

Group Based Discussion