Question

Become one with the Solow Growth Model

c. What happens if you introduce shocks? (e.g. one-time shock to population, capital

stock, unexpected changes to variable such as savings rate or the population
growth rate etc.) Do any of the curves shift? Does the steady state change?
d. Be prepared to make comparisons between countries using the model. What is the
difference between conditional convergence and unconditional convergence?

Answer 1

c) If shocks are introduced , curve shifts and thus changing the steady state capital stock.

For eg - due to a shock , saving rate increases.

It will shift the investment curve up , steady state per worker capital increases and steady state per worker output is also higher .

d Unconditional convergence is the idea or situation where if countries have the same saving rate , population rate etc but different capital stock , no matter they will converge to same growth rate.

Conditional convergence says that , if countries have diff savings rate and diff intial capital labor ratio , they will converge to same growth rates  but just not necessarily at the same capital-labor ratio. It will converge to there own steady state values