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Economic Development
(Economics 4550/5550)
Problem Set 2
Prof. Gene Chang
1.1 In the Harrod-Domar model, the warranted growth rate Gw is derived form the ratio of s and k.
Explain what s and k are. If the country is experiencing a technological revolution and as a result
more output will be produced from any given amount of investment, which variable, s or k, will be
affected? How will the growth rate Gw be affected?
1.2 A Harrod-Domar model can be described as follows,
Y=1000
S=150
k=3.
What is the warranted growth rate?
1.3 Draw an isoquant map and show the various growth paths of the Harrod-Dormar model. If
Gn > Gw, what is the true growth rate? What happens in the labor market?
2.1 Describe the stylized facts observed by Solow.
2.2 In the Solow model, the production function is F(K,E). If capital K and efficient labor E double,
what happens to the output Y?
2.3. Draw an isoquant map for the Solow model. Suppose we have a developing country LDC
where labor is cheap but capital is expensive. Suppose we have a developed country DC where
labor is expensive but capital is cheap. Show the two countries will adopt different technologies to
produce a given amount of output.
2.4 In the same map in 3.3, show the growth path and the stead-state path.
2.5. Characterize the steady-state in the Solow model.
3.1 In a Solow model with a production function Y  AK b L1b , and the growth rate of the labor
force is n and the saving rate is s. Solve for the steady state equilibrium K/L ratio in terms of A, n, s
and b.
3.2 Continue to solve for the steady state equilibrium Y/L ratio in terms of A, n, s and b.
4. What is the Golden rule saving rate? What is the steady state y that is associated with the
Golden-rule saving rate? Using a diagram to illustrate them.
5. What is the idea of the endogenous growth models?