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Problem 3 (20 points)
Most developed economies have grown substantially during the last decades. For example,
since 1990 the GDP of the economies classified as high income by the World Bank grew,
on average, 5.07%. According to our the real intertemporal model with investment, two
important sources of economic growth are increases in z and K.
(a) (10 points) Using our model, how could you tell if economic growth is driven by in-
creases in z or K? Which variables should we look at? Why?
(b) (10 points) What are the implications of your answer in part (a) for our models
ability to explain differences between high- and low-income countries or to explain
what happens over time as a country grows?

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