Question

1. Consider two economies with fixed, differential TFP’s and are otherwise identical.

   1. (a) In Malthusian models, can fixed, differential TFPs explain the persistent gap in per capita income

      betwee rich and poor countries? Please explain.

   2. (b) In Solow models, can fixed, differential T F P s explain the persistent gap in per capita income betwee rich and poor countries? Please explain.

   3. (c) In Solow models, can fixed, differential TFPs explain the East Asian miracle [the fast growth of Japan, South Korea, Hong Kong and Taiwan]? Please explain.

   4. (d) In Solow models, which economy has a higher golden rule saving rate?

Answer 1

a) The fixed , differential total factor productivity cannot explain a persistent gap in per capita income. In an economy with differential total factor productivity, an increase in the total factor productivity will not lead to an increase in per capita income. In Malthusian model only population control can explain an increase in per capita income.

b) In Solow model the persistent gap between the rich and poor countries can be explained by the changes in the total factor productivity. A continuous increase in the total factor productivity can explain a continuous increase in per capita income. The rich countries try to upgrade the technologies used in the production process on a continuous basis with the help of research and development. Thus, they are able to produce more and raise their standard of living.

c) The Solow model can explain the East Asian miracle. The East Asian countries grew at a faster pace with the upgradation of technology. As they invested more in increasing the technical know-how their per capita income increased. This is what the Solow model says.

d) The economy which has a higher golden rule saving rate will be with the economy which is continuously increasing the total factor productivity..