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Homework answers / question archive / MacroEconomics For one country the following numbers are the average values for the latest 5 years: depreciation rate of capital = 5

MacroEconomics For one country the following numbers are the average values for the latest 5 years: depreciation rate of capital = 5

Economics

MacroEconomics

For one country the following numbers are the average values for the latest 5 years:
depreciation rate of capital = 5.5 %, rate of growth of employment = 1.1 %, ratio of capital to output = 3.2, ratio of investment to output = 35.2 %.
What is the necessary rate of technological progress to achieve balanced growth. Explain your result.

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Q) Ans:-

Step1)

  

t=5years

Depreciation rate (d) = 0.055

Growth rate of employment (n) = 0.011

Capital : Output (k/y) = 3.2

Investment : Output (s) = 0.352 [ as closed economy]

Step2)

In balanced growth, per capita is due to technological progress.

In balanced growth rate:

gY = gK = gA

From the Solow growth equation:

Technological progress = s*(y/k) - (d+n)

Technological progress = 0.352 * (1/3.2) - (0.055+0.011)

Technological progress = 0.044

Technological progress = 4.4%

Therefore, the necessary rate of technological progress to achieve balanced growth is 4.4%

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