Solow growth model

Solow growth model

1. 1. What does 'diminishing returns to capital' mean in the Solow model?

   Returns to capital eventually fall to zero everywhereEach additional unit of capital per worker adds less output than the previous oneCapital depreciates faster as the country gets richerWorkers become less productive as capital grows

2. 2. A country permanently raises its savings rate from 25% to 50%. In the long run:

   Output per worker grows faster foreverOutput per worker reaches a higher level but eventually stops growingOutput per worker is unchangedOutput per worker falls because consumption is lower

3. 3. Which of the following raise the steady-state capital per worker k*?

   A higher savings rate sA higher population growth rate nA higher depreciation rate δA higher capital share α

4. 4. Why did South Korea overtake Ghana between 1960 and 2025, even though both had similar GDP per person in 1960?

   South Korea had a higher savings rate, which alone is enough to explain the gap in the Solow modelSouth Korea's natural resources were largerSouth Korea adopted and developed better technologies, plus invested heavily — the model points to technology as the driver of sustained growthGhana's population didn't grow