macroeconomy quiz 2

Consider the production model of chapter 4. As we discussed in class, it is a general equilibrium model. Please discuss in no more than 6 lines i) what general equilibrium means? and, ii) why do you think is important?

Differences in the productivity parameter (A) across countries turns out to be very important to explain cross-country differences un GDP per capita. However, they are more important if you consider the Solow model than if you consider the production model of Chapter 4. Why is that the case? Explain in no more than 5 lines providing economic intuition.

SECTION 1

You are asked to make comparisons of two pairs of countries. The first pair is the Latin American countries of Chile and Argentina; the second pair is France and Germany. You are given the following information: the average saving rate in Argentina is 13.4 percent, in Chile it is 21.3 percent, in France it is 22 percent, and in Germany, 20.3 percent.

  1. Assuming the countries are identical in every other way, which country would the Solow model predict to have the higher per capita real GDP between Chile and Argentina and; France and Germany?
  2. However, you go to the data and find out the real per capita GDP in each of the countries are $16,500 (Argentina), $21,548 (Chile), $31,446 (France), and $33,181 (Germany). Please interpret your results of part a) in light if the new information given to you.

SECTION 2

As discussed in class, the experience of countries like South Korea or Singapore can be considered as economic miracles. They were relatively poor and then after a period of very rapid economic growth they joined the group of rich countries. Use the Solow growth model with its diagrams by changing one of its parameters to describe such an experience of transiting from being poor to rich by growing fast. Please justify the choice of the parameter you choose to change by using your economic intuition and what we discussed in class about the economic reforms that took place on such coun-tries.