# Problem Set 1

| September 30, 2015

Problem Set 1

Two fictitious countries, Bigsea and Tadloch, produce only two products: boats, which are traded internationally, and seafood restaurant meals, which are not. The countries have equal populations. Bigsea’s currency is called “big” and Tadloch’s currency is called ”tad”. [Note k  1000.]
Boats Restaurant Meals
Bigsea 50
@ 30k bigs/boat 4k
@ 15 bigs/meal
@ 400 tads/boat 3k
 GDP per capita starts in USSR at \$300/year.
 The world’s industrialized economies start with GDP per capita of \$5000/year.
 Population growth rates are 2% everywhere in the world.
 All capital depreciates at 8% per year. a. At what average annual rate will income per capita in the USSR have to grow in order to overtake (i.e. to equal) the industrialized nations’ income per capita in exactly 30 years? Assume the industrialized nations’ income per capita is growing at 2% per year. b. If the USSR sustains the growth rate of part a., how long after it has overtaken the industrialized nations’ GDP per capita will it take for it to attain double the industrialized nations’ GDP per capita? Again, assume the industrialized nations’ GDP per capita is growing at 2% per year. For parts c.-e., assume the basic growth framework of Harrod-Domar, and that 1 ruble’s worth of capital always produces 0.5 ruble’s worth of output (i.e. A=0.5). Also, assume inputs are used more efficiently in the industrialized countries, so that A=0.6 there. c. What fraction of national output must the USSR devote to building new capital goods in order to attain the growth rate of part a.? What fraction would be left for consumer items? [Hint: another word for the fraction of output devoted to building new capital goods is the investment rate, i.e. the ratio It/Yt. And, remember that savings equals investment, so the investment rate equals the savings rate.] d. At what rate are the industrialized countries saving if they are growing at 2% per year? e. What would you calculate the ratio of consumption per capita in the USSR to consumption per capita in the industrialized countries when the USSR overtakes the industrialized countries (i.e. when GDP per capita is equal)? Assume the savings rates of parts c. & d. What would the ratio be when the USSR reaches double the industrialized nations’ GDP per capita?

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