Answer to Question #290550 in Macroeconomics for Kaju

Question

The government of a poor developing country fears that a political upheaval will occur unless

the growth rate is at least 4 percent per annum. The ICOR and the saving rate are projected to be

v = 5.0 and s = 14 percent, respectively.

a. Show that 4 percent growth cannot be achieved under these circumstances.

b. With the saving rate as given, what ICOR would be required to achieve the 4 percent growth

target?

c. What happens to the question (a) and (b) if population growth and depreciations in Harrod

Model is = δ = 0. 02 ?

Answer 1

Estimated growth rate = 4%

The ICOR, v = 5.0

The saving rate = 14%

a. Show that 4 percent growth cannot be achieved under these circumstances.

$Growth rate = Saving rate/ICOR$

$= 14/5 =2.8$

Therefore only 2.85 can be achieved under the given conditions and not 4%

b.With the saving rate as given, what ICOR would be required to achieve the 4 percent growth target?

$ICOR = Saving rate/Growth rate$

$= 14/4 = 3.5$

c. What happens to the question (a) and (b) if population growth and depreciation in Harrod Model is = δ = 0. 02 ?

δ stands for the rate of depreciation of the capital stock. For δ = 0. 02, the growth rate will be les than 4% and the ICOR value above would not be achieved.