Macro Pset 2

# Macro Pset 2 - Economics 3213 Answers to Problem Set 2 The...

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Economics 3213 Answers to Problem Set 2: The Jungle Book Prof. Xavier Sala-i-Martin 1. The Bare Necessities i. The finding that the growth rate of real per capita GDP shows little relation to the initial level of real per capita GDP does not conflict with the neoclassical model. The Solow-Swan model predicts conditional, rather than absolute, convergence. Poor countries are probably very different from the rich ones in terms of their rates of saving s , population growth n , depreciation ! , technology A , and even income share " . Hence they have different steady states. ii. Absolute convergence simply means that poor countries tend to grow faster than rich ones. If there is a negative relation between income per capita and growth rate, this is absolute convergence. Notice that if poor countries are growing faster, eventually they will catch up with the rich ones and then will all grow at the same rate. That's why it's called absolute convergence, or simply convergence. Conditional convergence means that poor countries grow faster than rich ones only if they have similar parameters (saving rate, population growth, technology, and depreciation). Notice that it implies that they have similar steady states. Hence poor and rich countries will converge only if they have the same steady states. Romer's AK model does not predict any kind of convergence. In the AK model, if two countries have the same parameters A , s , n , and ! , they will be growing at the same rate forever. If one is richer than the other, the poor will never catch up. If, on the contrary, they

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