Parameters of the economy

Assume that an economy uses a CRS production function and it takes the following form:

Y = K 1/3 (AN) 2/3

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where K is capital, N is labor, A is the state of technology, 1/3 is the capital share, and AN denotes the amount of effective labor in the economy.

Suppose that the saving rate is s = 12%, the rate of depreciation is δ = 7%, the number of workers grows at rate g N = 2% per year and that the rate of technological progress is equal to g A = 4% per year for this economy.

Part a. (25 points) Given the parameters of the economy, compute the following:

  • The steady-state value of the capital stock per effective worker
  • The steady-state value of output per effective worker
  • The steady-state value of the growth rate of output per effective worker
  • The steady-state value of the growth rate of output per worker
  • The steady-state value of the growth rate of output Part b. (10 points)

Assume now, country’s saving rate has increased from s = 0.12 to s 0 = 0.14. How does it affect the steady state values of capital stock per effective worker, output per effective worker, growth rate of output per effective worker and growth rate of output. You do not have to calculate the new values, just explain the changes (no change, decrease, increase) and, more importantly explain the intuition.

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