Question

Assume, as per Piketty (and per our 2^nd example of a production function above), that the capital share of output increases with capital intensification and decreases when capital per worker declines. Would our hypothetical case of faster depreciation increase inequality or reduce it? [2 or 3 sentences is fine.]

Immigration: A country is considering two immigration policies. What would Solow’s model predict for each of these policies?

Answer 1

As we see that faster depreciation will reduce capital per worker in the Solow model, the economy will reach a new steady state where capital per worker is now at a lower level. Given that the capital share of output decreases when capital per worker declines, we believe that faster depreciation will reduce capital share of output, increase labor share and therefore increases labor income. Hence labor inquality is reduced.

Solow Model predicts that if labor is increased (for a given level of capital) as a result of immigration, as seen in the case of population increase, the capital per worker will reduce.