Suppose that we are comparing two countries, Venezuela and the Netherlands where the actual GDP per capita in 2012 were $4000 and $40,000 respectively. Assuming that both countries have the same production function, \(y=k^{a}\) , the same values of \(\delta\) (at 5%) and that the value of \(\alpha\) is 1/3.
The following table shows data on rates of savings (s), population growth rates (n) and years of schooling in the two countries :
a) Suppose you only have access to the rates of savings and population growth data but do not have access to the data on years of schooling (the last column of the table), use the Solow model to calculate the ratio of the steady state levels of income per capita of Venezuela to the Netherlands.
b) Suppose you are told the average years of schooling in each country. Using the same returns to schooling as reported in pages 166-167 of Weil (which are also the same figures that we assumed in class) as well as the data on savings rates and population growth rates, now calculate the ratio of output per worker in the steady state that the Solow model predicts in the two countries where the production function now is y = k h.