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    Neoclassical Model & Growth Accounting Equation

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    See the attachment for the full question.

    5. (see attachment for the growth accounting equation)
    Growth rates of K (capital) and N (labor) are weighted by their respective income shares, so that each input contributes an amount equal to the product of the input's growth rate and their share of income to output growth. The Δ indicates the change in the variable.

    (a) The steady state equilibrium for the economy is the combination of per capita GDP and per capita capital (k) where the economy will remain at rest, or where per capita economic variables are no longer changing OR (see attachment for equation)

    (b) Explain why, in the Neoclassical growth model, an increase in the savings rate does not increase the growth rate of per capita output in the long run.

    (c) Explain why:

    (1) An increase in the rate of growth of the population, n, reduces the steady state level of k and y

    (2) An increase in n increases the steady state rate of growth of aggregate output
    and;

    (1) A decrease in n increases the steady state level of k and y
    (2) A decrease in n decreases the steady state rate of growth of aggregate output.

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    The Solow growth model shown here is the basis of all growth accounting models and, although it should not be taken as holy writ, it is a generalizable model of what drives the growth of nations.

    In reference to the two questions,

    (b) Explain why, in the Neoclassical growth model, an increase in the savings rate does not increase the growth rate of per capita output in the long run.

    In this model, savings is equated to "capital requirements:" algebraically this is shown as (n+d)k = sY (s is ...

    Solution Summary

    This problem looks at the Neoclassical Model and the Growth Accounting equation and how it affects per capita income and income growth.

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