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Solow model

6. According to the Solow model, how would each of the following affect consumption per worker in the long run (that is, in the steady state)? Explain and illustrate your answer graphically.

6a. The destruction of a portion of the nation's capital stock in a war.

6b. A permanent increase in the rate of immigration (which raises the overall population growth rate)?

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I can only give you the basics of the model and (importantly) the assumptions. I cannot graph the issues or give you answers, but I will give you links for sample graphs. Since the model is so simple, its really not that hard to graph. The key is keeping the variables separate.

First, the variables. The model is simple. The big issue is (new) capital production. Labor is a constant, but knowledge is a variable of itself. It is closely connected with the idea of technological development and the ability to use it.
Q/L is output per worker measured by technology per worker. This is impacted by the stock of capital, its growth, savings, growth in education (or the knowledge to work new capital), the existence of new capital (think of it as high-tech stuff that improves production).

Take a look here for a fairly simple explanation: http://www.pitt.edu/~mgahagan/Solow.htm
And a simple graph: http://www2.econ.iastate.edu/classes/econ302/alexander/Spring2006/SOLOW/SOLOWGROWTHMODEL.htm
Another good one: http://economics.sas.upenn.edu/~vr0j/econ10205/lectures/grow5_solow.pdf

Second, the assumptions. Diminishing returns is a constant issues so long as knowledge (?effective production?) remains the same. ...

Solution Summary

Solow model is clearly assessed.

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