What is happening to living standards in this country

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Reference no: EM131003657

Imagine a Harrod-Domar setup. Suppose that a developing country's capital-output ratio (k) is 4, and the savings rate (s) is 12%. Depreciation is 1%, and the population growth rate is 2%.

a. What will be the equilibrium growth rate of GDP?

b. What is happening to living standards in this country?

c. Suppose the country wanted to achieve a growth rate of 3%. With this target, what would happen to the standard of living? Would a growth rate of 3% be possible with the country’s conditions? What would be the financing gap?

d. Suppose the country’s GDP were $12 billion. Express the financing gap in monetary terms.

e. What does the Harrod Domar model assume regarding a country’s production function? How is this assumption different from the Solow model’s?

f. What are the main strengths and the main drawbacks of the Harrod Domar model?

Reference no: EM131003657

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