Question

In 1970, Benin and Botswana had similar saving rates (around 3% of GDP) and similar levels of income per capita (around $600 in 2005 dollars). In the 1970-2017 period, Benin’s saving rate gradually increased to 10%, whereas Botswana’s increased to 30%. Assume that multifactor productivity increased the same in both countries over this period. (a) Use the Solow model to predict the effects on the steady-state income per capita for both countries and compare. (b) In 2017, income per capita was around $860 in Benin, and $7,500 in Botswana. Is this consistent with your theoretical predictions from (a)?

Answer 1