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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 = 5.5 %, 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.
Expert Solution
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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