Econ 496: Growth and Development
Assignment 2
The due date for this assignment is Wednesday October 27.
1. According to the Solow model, the steady state capital-labor ratio k∗ is determined by
the equation:
(n + δ)k∗ = σf (k∗ ).
Let f (k) = Ak θ (Cobb-Douglas). The parameter θ represents capital’s share of the
GDP, so let θ = 1/3. Since δ represents the annual rate of depreciation, let δ = 0.10.
From the data in the textbook, the average population growth rate appears to be
n = 0.02 and the average saving rate around σ = 0.20. Using the equation above,
find a value for A such that the steady state level of output is equal to one; i.e.,
y ∗ = A(k ∗ )1/3 = 1.0.
2. Now, with A determined above, compute different values for y ∗ by varying the parameters n and σ (over reasonable ranges) and report your results in a table. Can the Solow
model generate cross country income disparity in the order of magnitude observed in
the data?
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