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Macro Question 1: y Ak K K Are

The document describes two production functions - a low technology with diminishing returns and a high technology with constant returns. For the low technology, the steady state capital per worker is 25 and countries below this will grow until reaching it, while those above will decline. The growth rate is -0.01. For the high technology, capital per worker grows at 0.08 permanently without a steady state. There will be convergence for countries below an initial capital of 50, but not globally as high-tech countries above 50 can grow indefinitely.

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25 views

Macro Question 1: y Ak K K Are

The document describes two production functions - a low technology with diminishing returns and a high technology with constant returns. For the low technology, the steady state capital per worker is 25 and countries below this will grow until reaching it, while those above will decline. The growth rate is -0.01. For the high technology, capital per worker grows at 0.08 permanently without a steady state. There will be convergence for countries below an initial capital of 50, but not globally as high-tech countries above 50 can grow indefinitely.

Uploaded by

ADITYA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Macro Question 1

The (per capita) production function for the low technology is y = Ak a = k .5 , where y and k are
output and capital per worker respectively. The capital per worker changes according to the
following equation k& = sAk a (n + )k = .1k .5 .02k . In the steady state k& = 0 , and thus
5 k = k or k = 25. If the country starts with the initial capital stock per worker below 25, GDP
per worker and capital per worker grow until they reach the steady state. If the country starts
with k above 25 (but still uses the low technology), then GDP per worker declines until it
achieves the steady state. The growth rate of GDP per capita is
y& .5k .5k&
k&
.1k .5 .02 k .05
y = =
=
.5
=
.5
=
.01 .
y
k .5
k
k
k
The (per capita) production function for the high technology is y = Ak = k . The dynamics of k
is described by the following equation k& = sAk ( n + )k = .1k .02 k = .08 k . There is no steady
state with the high technology both GDP per capita and capital per capita grow at the same
constant rate
y& k&
y = k = = = .08 .
y k
1. Now, we can draw the graphs.
a) k = 1 .
y

time

ln y

ln5

0
b) k = 49 .

time

time
0

ln y

ln5

time

c) k = 60 .

.08

time

ln y

time

2. There will be no convergence in GDP per capita in the world. While all countries starting
with a capital stock per capita below 50 will converge, the countries starting with k above 50
will be able to use the high technology and will grow without convergence. A plot of the growth
rate of GDP per capita against initial GDP per capita will look as follows.

y
.08

50

y initial

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