question archive Assume that the Solow model provides an accurate representation of the two Germanies around the late 80s and early 90s
Assume that the Solow model provides an accurate representation of the two Germanies around the late 80s and early 90s
Subject:EconomicsPrice: Bought3
Assume that the Solow model provides an accurate representation of the two Germanies around the late 80s and early 90s. Although in 1990 both countries re-uni ed, for this problem we will treat them as two separate economies, and we will model the effects of the reunification as a one-time ow of resources (capital and/or labor) across the common border.Aside from being in steady state initially, assume that before the re-unification both economies had the same saving rate, the same rates of population growth and depreciation, and that capital was equally important for production in both countries, with a common value of a = 1/2
Now consider reunification. Let's think of it as a one-time migration of workers from East to West Germany. In the remainder of the problem, we will take the perspective of East Germany. 5. Use the phase diagram of the Solow model to trace the effects of the reunification, i.e. of a one-time decrease in the labor force of East Germany. Discuss the forces at work along the transition. 6. In three figures, sketch the evolution through time of capital per capita, investment per capita and (the logarithm of) aggregate output. Make sure your figures include the initial steady state (that is, some periods before the re-unification), the shock, several periods after the shock, and the final steady state.
