Question

Note: using the solow growth model without population growth

Using the Solow growth model, discuss the likely impact of the following changes on the level of Canadian output per worker in the long run (that i:s steady state): (30 percent) (a) The government of Canada has introduced a Tax Free Saving Account legislation that allows Canadians to open up a savings account that is sheltered from income tax. (b) Canadian female participation (but constant population) is expected to continuously increase in the coming years.

Answer 1

The Solow growth model has been one of the benchmark models of economic studies. Solow model of economic growth is considered as a turning point in the basic concept of economic study and holds an auspicious position among the greatest economic concepts. The Solow growth model states that, the ratio of labor in proportion to the capital goes up when there is a sustainable investment of capital which leads to a sustained increase in the growth rate in the economy. This may lead to a decline in the marginal product of the additional units of the capital which ultimately leads to the economy on the path of exogenous success in the longer run.

                             Answer (a): Income tax is critical to the Government machinery as it is the most trusted and valuable source of income for the Government. However, income tax has also been seen as resulting in to the loss of valuable capital for the common man. If the Government of Canada introduces a tax-free saving bank account for the people, it means that, now the people of Canada can have an account from where no money would be deducted as interest charges and they would only earn interest from this account once they have a substantial amount of deposit. This step by the Government would ensure that the amount of capital in the hand of the people would increase. If we look at the macro picture, we can understand the huge impact of this step by the Government. If the savings of the people increases, the tendency to invest in the market also increase. Along with the tendency to invest in the market, there I also a rise in the tendency to consume more products form the market. What these tendencies do, is that they pull out more money from the hands of the people and flush them in to the market. This increase in the capital influx in to the market leads to the demand rise in the economy, which then leads to the employment of more workers as laborers to meet the required demand. The laborer earns more wages and the wages also come out as consumption expenditure and further investment in the market, which further leads to a cycle of increased and productive growth in the economy.

Answer (b) : Answer (b): Canada has had a history where the male has been he dominant player in the market. This means that the contribution of the females in the market set up and economic institutions and forces has been comparatively lesser. If the Canadian female participation in the market forces is expected to continuously increase in the coming years, this would mean that the market will see a huge influx of exogenous capital. This will be over and above the normal influx of capital which the males usually do in to the market. Increase female participation will result in to the savings of the females to come out in to the market and will thereby result in to the interest in the economy decreasing. This will lead to an increase in the demand forces, thus pushing the manufacturers to increase more of their productivity. This requirement will need more of the labor force being employed, which in turn will increase the wages of the workers. This increase in the wage will further come out in the market tin the firm of consumption expense and further investment, this creating a cycle of prosperous economic growth.