If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock: will be at the same level as in the steady state of the high capital economy. will be at a lower level than in the steady state of the high capital economy. will be proportional to the ratio of the capital stocks in the two economies. will be at a higher level than in the steady state of the high capital economy.

Question

Greta Cox

Business

10 March, 02:04

If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock: will be at the same level as in the steady state of the high capital economy. will be at a lower level than in the steady state of the high capital economy. will be proportional to the ratio of the capital stocks in the two economies. will be at a higher level than in the steady state of the high capital economy.

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Answers (2)

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Eli · Answer 1

Will be at the same level as the steady state of the high capital economy

Explanation:

The steady state level of income per worker in the economy with the small capital stock will be at the same level as the steady state of the high capital economy.

This is owing to the same identical metrics they shared, save the capital stock.

Here, the two economies have the same saving rate, population growth rate and productivity - efficiency rate. Thus, they are growing at the same pace and level. The implication of this, however, is that capital stock is not among the variables that could impact on the income of a worker in the economy. Here, it is not among a determinant to dictate the level of earnings. If anything, requisite factors like saving rate, population growth, and efficiency remain the critical factors that could influence the level of income. In this vein, these are identical.

Hence, we shouldn't be distracted with the introduced varying capital levels.

Marley Cooke · Answer 2

Will be at the same level as the steady state of the high capital economy

Explanation:

The Solow growth model states that in the long run there should be no difference in economic growth between the countries. This model only considers population growth rate, savings rate, and capital depreciation rate to determine the growth of a country's income level. It does not consider differences in capital stock, since "poorer" (less capital stock) states tend to grow at a faster rate, until they will finally converge with richer states.

The only way that the economies will not converge in the long run is that their savings rate are not equal. The most important factor in determining long run growth rate is the economy's savings rate.