Question

Economic Growth II — Work It Out Question 1 An economy has a Cobb-Douglas production function: Y = K (LE)-a The economy has a capital share of 0.25, a saving rate of 47 percent, a depreciation rate of 4.00 percent, a rate of population growth of 2.25 percent, and a rate of labor-augmenting technological change of 2.5 percent. It is in steady state. a. At what rates do total output and output per worker grow? Total output growth rate: % Output per worker growth rate:

Answer 1

• Saving rate = 47 percent

s = 47%

• Depreciation rate = 4 percent

d = 4%

• Population growth rate = 2.25 percent

n = 2.25%

• Rate of labor augmenting technological change = 2.5 percent

g = 2.5%

Total output growth rate = n+g

Total output growth rate = 2.25% + 2.5%

Total output growth rate = 4.75%

Output per worker growth rate = g

Output per worker growth rate = 2.5%

The steady-State growth rate of output per effective worker is 0%.

Output per effective worker is constant in the steady-state and does not change.

Answer: Option (a)