Economia V; Instructor: Marco Del Negro

Problem set 11, Solutions

a) This is the standard picture explained in class: per capita capital converges to the steady state due to decreasing marginal returns to capital. See figure 1.
b) See figure 2.
c) If there is capital mobility in the sense that new investment flows to the country where the return is the highest, then no one will invest in the US until the return to capital in the US is as large as in Mexico. This implies that capital (and output) will grow faster in Mexico than under no capital mobility, as both countries are investing there. Note that capital stays constant in the US until the returns are equalized; that is, given the assumptions adopted here, until per-capita-capital is equal in both countries. See figure 3 (Solid line: capital mobility. Dashed line: no capital mobility). What happens if old capital can move as well?
d) When Asian countries (but also LAtin American) opened their capital markets they started growing at a faster pace than they did before, consistently with the above analysis.