Recently a coup occurs in Bangladesh, a developing country where the steady stat

Question

Recently a coup occurs in Bangladesh, a developing country where the steady state equals to the golden rule initially. Due to the political instability, the birth rate in Bangladesh falls slightly and the emigrant rate jumps slightly, resulting in a lower dilution rate. Even firms which still operate in the country (including Burger King, Domino's and Popeye's, etc.) become conservative and thus decrease the investment rate dramatically. Also, during the coup huge amounts of existing factories are destroyed and machines are stolen by anarchists. The coup causes some death as well. Assume all other factors including technology and depreciation rate keep unchanged.

A) What happened to the per worker productivity?

B) What happened to the steady state per work capital level?

C) What happened to the golden rule per work capital level, and what happened to the maximal possible sustainable consumption level?

D) Do your answers to parts B and C contradict each other? Why?

Explanation / Answer

a) When birth rate falls and emigration is in process, number of workers fall. Hence each of the remaining worker has more capital to work with so that per worker producitivity rises. But since capital is also destroyed in the form of stolen machines, etc, per worker productivity may fall.

b)

The net marginal product of capital, MPK-, at the Golden Rule level of Capital, is equal to the growth rate of total output n + g. The economy is said to be operating with less capital than in the Golden Rule steady state if the net marginal product of capital, MPK- is greater than the growth rate of total output (n + g), exhibiting diminishing marginal product (MPK- > n + g).

Here also, with fall in n, n + g falls so that there is diminishing marginal product of capital. Hence the steady state per work capital level falls

c) Golden rule steady state level of capital is that steady state value of capital stock per worker (k) that maximizes the consumption spending of the society. With less capital stock, the goldnen rule steady state level of capital per workers falls.

d) Yes. They contradict because both labor and capital are decreasing at the same time.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.