Question

8. Per capita GDP in the long run: Suppose an economy begins in steady state. By what proportion does per capita GDP change in the long run in response to each of the following changes? (a) The investment rate doubles. (b) The depreciation rate falls by 10%. (c) The productivity level rises by 10%. (d) An earthquake destroys 75% of the capital stock. (e) A more generous immigration policy leads the population to double.

Answer 1

Suppose an economy begins in steady state.

sf(k)=(n+d)k

in following proportion, per capita GDP change in the long run in response to each change given below:

a) the investment doubles.

if the investment rate doubles, per capita GDP will rise because investments will be higher than the growth rate of the steady state.

b) The depreciation rate falls by 10%.

if the depreciation rate falls by 10% , things get cheaper however this will not affect per capita GDP because we are approaching the steady state.

c) The productivity level rises by 10%.

if the productivity rate increases , per capita GDP will rise but at a consistence diminishing rate approaching the steady state .

d) An earthquake destroys 75%of the capital stock

If an earth quake destroys 75 percent , GDP will drop drastically but will increase exponentially until it approaches its steady state .

e) A more generous immigration policy leads the population to double.

If population rate doubles, per capita GDP will fall drastically.