Consider two countries ‘Milkie’ and ‘Cookie’. The two countries have identical per capita production function, y = Ak^0.5 , with initially the same level of technology, A = 1. Also, assume that the saving rate is s = 0.2 for ‘Milkie’ and s = 0.3 for ‘Cookie’, respectively, while the two countries have identical population growth and depreciation rates both equal to 0.1.

(a) Which country has a higher steady state income per capita? Determine the steady state income per capita for each country. Which country has a higher steady state growth rate in per capita income? Why?

Guest Jun 19, 2017