In 1990 Congo and Indonesia had similar saving rate around 3

In 1990, Congo and Indonesia had similar saving rate (around 30% of GDP) and similar levels of income per capital (around $5000 in 2005 dollars). In the 1990-2016 period, Congo\'s saving rate decreased to around 10%, whereas Indonesia\'s stayed around 30%. Assume that multifactor productivity increased the same in both countires over this period. A: use the solow model to predit the effects on the steady-state income per capital for both counties and compare B: In 2016, income per capital was around $5000 in the Congo, and $11000 in Indonesia. Is this consistent with your theoretical predictions from A?

Solution

Ans

A According to solow model growth rate in Indonesia will be higher than in Congo till economy reaches steady state level. At steady state both will have same growth rares

B Yes this is consistent with our theoretical predictions.