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Foreign aid from rich to poor countries is an important and controversial topic in economic growth. Suppose that a rich country gives a large quantity of foreign aid to a poorer country and the foreign aid comes in the form of physical capital K (power plants, factories, etc.).

(a) Using the Solow model, describe how this gift of foreign aid a?ects output in the poorer country over time and in the long run? How does this answer depend on whether the poorer country is above, below, or at its steady state prior to receiving the foreign aid?

(b) Suppose now that the poorer country is initially in its steady state. Assuming this gift of foreign aid occurs in the year 2010, draw both a Solow diagram (that includes output) to describe the dynamics of the poorer country's economy as well as a diagram showing how its output evolves over time.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M941768

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