Imagine a Harrod-Domar setup. Suppose that in 2014 Acirema the capital-output ratio (v) is 5, and the savings rate (s) is 21%. Depreciation is 1.5%. Furthermore, GDP in 2014 in Acirema is $12 billion, and population is 15 million, which represents a 2% increase in population.1) What will be the growth rate of GDP?2) How long would it take Acirema to double its GDP?3) What can you say about the LEVEL and the GROWTH rate of the standard of living in Acirema?4) Would the growth rate you found in (1) be enough to ensure development? Explain.5) Is Acirema a high income, middle income or low income country?

1) Harrod-Domar model:

s / Ø = n + g + ð

Where s is savings rate, Ø is capital-output ratio, n is the rate of population, g is the growth rate, and ð is the rate of depreciation.

0.21 / 5 = 0.02 + g + 0.015

0.042 = g + 0.035

g = 0.042 – 0.035 = 0.007

g = 0.7% (growth rate of GDP)

2) Acirema will double its GDP in = 70/0.7

Acirema will double its GDP in 100 Years.

3) The level and the growth rate of the standard of living in Acirema is considerably at very low level. It’s because of infinitesimal level of GDP growth.

4) According to the above calculations, Acirema's current growth rate is not all sufficient to ensure development.

5) Acirema, going by the indicators, belongs to low-income category of nations. The per capita GDP income works out to only $800. [$12 billion / 15 million]

Explanation:

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