3. Solow Growth Model and Chinese Population Growth: After many decades of rapid population growth, China adopted a “one child” per couple policy in 1980 to reduce its population growth rate. Let’s use the Solow Growth Model to examine the effects of this change, assuming the one-child policy was permanent.
a) According to the Solow Growth Model, what would be the one child policy’s effects on the growth rate and on the level of Chinese capital per worker and output per worker in the long run? (Let’s ignore technology growth for this problem.) Draw a diagram to illustrate your answer.
b) In many countries, people rely on their children to help support them when they retire. Thus, a possible side effect of the “one child” policy is that it might increase people’s saving for retirement, because they have fewer children to help support them. Suppose that the “one child” policy increased China’s savings rate as well as reduced its population growth rate. How would this affect your answer to part a)? Draw a diagram to illustrate your answer.