Question

If the current capital stock in South Korea is greater than the current capital stock in
China, but their level of TFP is the same, then according to the principle of transition
dynamics:
(a) China initially will grow slower than South Korea, but each will have the same
steady state
(b) China initially will grow faster than South Korea, but each will have the same
steady state
(c) China will grow faster than South Korea and overtake it eventually
(d) China will grow slower than South Korea and never catch up
(e) Both China and South Korea will grow at the same rate because TFP is the same

pls explain the reason, thank you

Answer 1

Option B.

• Given that the current capital stock in South Korea is greater than the capital stock in China but their total factor productivity is the same.
• Then according to the principle of transition dynamics we know that china will grow faster than Korea but each will have the Same steady state.
• This is because, the principle of transition dynamics explains how any economy with less capital stock or an economy which lies far below it's steady state will progress much faster than an economy with higher capital stock or an economy which lies close to steady state.
• Hence china with lower capital stock will initially progress faster when compared to South Korea.
• But as they have same TFP the steady state remains the same for both the economies.