An increase in the labor force: Consider a onetime change on government policy that immediately and permanently increases the level of the labor force in an economy (such as a more generous immigration policy). In particular, suppose it rises permanently from L to L 0. Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run. In particular, comment on what happens to the level and growth rate of per capita GDP.

Question

Business

Pedro Morales

1 February, 11:54

An increase in the labor force: Consider a onetime change on government policy that immediately and permanently increases the level of the labor force in an economy (such as a more generous immigration policy). In particular, suppose it rises permanently from L to L 0. Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run. In particular, comment on what happens to the level and growth rate of per capita GDP.

+2

Answers (1)

Know the Answer?

Avery Pope · Answer 1

The answers are down below

Explanation:

Let n be the growth in the labor force.

Since labour (L) is increasing, k=K/L falls. Similarly, y = Y/L will fall too.

Now change in K can be calculated as:

Δk=[s * f (k) ] - (S*k) - (n*k)

Here,

- (n*k) = decrease in capital stock per unit of labor

Also the steady condition is s * f (k) = (S + n) k.

Therefore as labor (L) is increasing at the rate of 'n', Y (GPD per capital) will also increase at the rate of 'n'. Similarly, K (Per capital) will also increase at the rate of 'n'.