Question

28. Consider the Solow model with exogenous growth. Assume that because of global warming the depreciation rate increases. Illustrate the change in the steady state. What happens to the growth rate of standard of living in the new steady state?

Answer 1

Ans.

Solow growth model is the structure used to decide the basic wellsprings of growth for an economy.

The model shows that the economy's profitable limit and potential GDP increment for two reasons:

- accumulation of such contributions as capital, labor, and crude materials utilized underway, and

- discovery and use of new advancements that make the contributions to the creation procedure progressively beneficial—that is, ready to deliver more merchandise and ventures for a similar measure of information

Solow built up a model that clarified the commitment of labor, capital, and technology (complete factor profitability) to financial growth.

The growth accounting equation shows that the rate of growth of potential output equals growth in technology plus the weighted average growth rate of labor and capital.

Growth in potential GDP = Growth in technology + WL (Growth in labor) + WC (Growth in capital)

The equation shows that improvements in technology are more important than capital in raising an economy’s standard of living.

In the given questions we have been informed that because of the global warming depreciation rate has increased.

This will negatively impact the standard of living. And because of higher depreciation rates and diminishing returns to capital, the only way to sustain growth in potential GDP per capita is through technological change or growth in total factor productivity.