3. Two Islands with Solow Economies There are two islands, Avalon and Baltia, wh

Question

3. Two Islands with Solow Economies There are two islands, Avalon and Baltia, which have identical economies satisfying the assumptions of the discrete Solow model. In particular, output in both economies is produced with the neoclassical production function F(K, AL) using inputs capital K, technology A, and labor L. In addition to identical production functions, the de- preciation rate , savings rate s, population growth rate n, and technology growth rate g are the same in each economy. Variables in the Avalonian economy are denoted with a superscript A and variables in the Baltian economy with a superscript B. For exam- ple. Avalonian output is YtA-F(KA,A"LA). Baltian output is YtB-F(Kp. ApL2), and so on. In periodt0 both economies are at their Solow steady state levels of capital per efficiency unit of labor, and they have identical initial conditions A (a) In the long run, continuing at the Solow steady state, what is the growth rate of the combined output Y4 +Y of the Avalonian and Baltian economies? (b) From this point onwards, assume that the common production function takes a Cobb-Douglas form, with FUK. AL)-Ko (AL)i-a for 0

Explanation / Answer

(GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly. Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons.

GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between nations.

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