Question

Country A and country B are the same except country A has a capital stock of 5,000 a population of 12,000 and employment of 10,000. Country B has a capital stock of 8,000 and a population of 24,000 and employment of 20,000.a. Country A has a higher standard of living but country B will catch up.b. Country B has a higher standard of living but country A will not catch up.c. Country B has a higher standard of living but country A will catch up.d. Country A has a higher standard of living but country B will not catch up.

Answer 1

a. Country A has a higher standard of living but country B will catch up

Step-by-step explanation:

"Country A and Country B are the same except capital, population and employment" So their income is the same.

Therefore, the income per capita in Country A is higher, as there is fewer population. This will come to conclusion the living standard for Country A are better than Country B

Country B will eventually catch up according to Solow models.

As the capital will, increase the productivity of more workers. This will make the return on capital greater in country B. This will make more attractive to invest in Country B than Country A. Making the Country B eventually catch up with Country A