Consider a small country with a capital stock equal to 900 units. This year it produced 20 units of new capital goods, with a depreciation rate of 10% and a production function of Y = K^1/2. If there is no technological advancement, what will the growth rate in this country be over the next year?

Question

Quizplus · Accepted Answer

Firstly, calculate the net investment, which is the difference between investment and depreciation:
Net investment = 20 - 0.1(900) = 11
Next, calculate the output:
Y = K^0.5S^1U^1P^0.5
Y = 900^0.5(1)(1)(1)^0.5 = 30
Thus, the growth rate is:
(30 - 900)/900 = -0.9667 or -3.97% rounded to two decimal places.

Consider a Small Country with a Capital Stock Equal to 900