Suppose you are given the data for Brazil and Portugal. In Brazil, the saving rate is 0.1 and the depreciation rate is 0.1, while in Portugal the saving rate is 0.2 and the depreciation rate is 0.1. Using the Solow model, you conclude that in the steady state:
A) Brazil has a higher level of output than Portugal.
B) Brazil has a higher capital-output ratio than Portugal.
C) Portugal has a higher level of output than Brazil.
D) Portugal has a higher capital-output ratio than Brazil.
E) Portugal and Brazil have the same capital-output ratio.

Question

Quizplus · Accepted Answer

The Solow model predicts that in the steady state, countries with higher saving rates will have higher capital per output ratios. In this case, Portugal's saving rate is higher than Brazil's, which means that Portugal will have a higher capital per output ratio in the steady state. Therefore, the correct answer is D – Portugal has a higher capital-output ratio than Brazil. The level of output is not determined by the saving rate or depreciation rate alone, but by the combined effect of all factors in the Solow model.

Suppose You Are Given the Data for Brazil and Portugal