Question 1 This question asks you to explain the dynamics of income and growth i

Question

Question 1 This question asks you to explain the dynamics of income and growth in a Solow model with a technology poverty trap. The diagram for this poverty trap is given below. Please answer all questions in relation to this diagram. flows outflows (d+n)k inflows sz(k)f(k) kl k2 k3 k4 k5 k6 k7 a) kl-k7 give different possible points for capital per worker (kl is at the origin). For each, list b) Suppose that the country started at kl; where will it end up? Repeat this exercise for each of c) Which point or points on this graph correspond to a poverty trap? whether or not it is a steady state. If it is a steady state, list whether or not it is stable. the other points k2-k7. d) List two different policies that would raise this country out of a poverty trap: one that could be implemented domestically, and one that could be implemented by foreigners

Explanation / Answer

a. The steady state occurs at all the points where the savings curve intersect the population and depreciation line. So, it occurs at k3,k5 and k7. k3 and k7 represents steady state equilibrium. To the left of these point , inflows exceed outflows . so, capital per worker will increase. and to the right of this point, outflows exceed inflows and thus capital per worker will decrease.

b. A country starting before k3 points will end up at k3. AT k3 a big push is needed to move the country out of the stable poverty trap equilibrium and move at k5. After this point the country will end up at k7 because k5 is not a stable equilibrium.

c. k3 corresponds to a stable equilibrium and also represents poverty trap.

d. Improving the quality of life of people is the best way to move out of poverty. Domestically, the country should focus on improving infrastructure, providing quality health and education to the masses. And also foreign companies setting up their plants in domestic country provides employment to the low skilled workforce. This will help in reducing poverty.

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