1. According to the growth accounting approach, what are the three sources of economic growth? From what basic economic relationship is the growth accounting approach derived?
The factor of production
From the production function
2. How did technology increase U.S. economic growth in the 1990s?
The rise in productivity growth in the 1990s occurred
because of the revolution in information and communications technologies (ICT).
Not only were there improvements in ICT, but also government regulations did not
rein in the growth of productivity in the United States, as they did in other
countries, such as those in Europe. In addition, intangible investment (research
and development, reorganization of firms, and worker training) allowed the ICT
improvements to boost productivity.
3. Explain what is meant by a steady state. In the Solow model, which variable are constant in a steady state?
A steady state is a situation in which the economy’s output
per worker, consumption per worker,
and capital stock per worker are constant.
4. According to the Solow model of economic growth, what will happen to output per worker, consumption per worker, and capital per worker in the long-run?
If there is no productivity growth, then output per worker,
consumption per worker, and capital per worker will all be constant in the long
run. This represents a steady state for the economy.
5. True or false and explain with graphs? The higher the steady-state capital to labor ratio is more consumption each worker can enjoy in the long run.
The statement is false. Increases in the capital-labor ratio
increase consumption per worker in the steady state only up to a point. If the
capital-labor ratio is too high, then consumption per worker may decline due to
diminishing marginal returns to capital, and the need to divert much of output
to maintaining the capital-labor ratio.
6. What effect should each of the following have on the long-run living standards, according to the Solow model? Illustrate your answer with graphs.
a. An increase in the saving rate.
(a) An increase in the saving
rate increases long-run living standards, as higher saving allows for more
investment and a larger capital stock.
b. A decrease in the population growth rate.
(b) An increase in the population
growth rate reduces long-run living standards, as more output must be used to
equip the larger number of new workers with capital, leaving less output
available to increase consumption or capital per worker.
c. A one-time improvement in productivity.
(c) A one-time increase in
productivity increases living standards directly, by increasing output, and
indirectly, since by raising incomes it also raises saving and the capital
stock.
You should be able to graph this. We have examples in our notes.
7. An economy has the per-worker production
y = 3k^.5
where y is output per worker an k is the capital-to-labor ratio.
a. A developed country has a saving rate of 28 percent and a population growth rate of 1 percent per year. A less-developed country has a saving rate of 10 percent per year and a population growth rate of 4 percent per year. The rate of depreciation in each country is 4 percent per year. Find the steady state values of k, y, i, and c for each country.
Developed Less-Developed
Saving Rate = .28
Saving Rate = .10
Pop growth = .01
Pop growth = .04
Dep rate = .04
Dep rate = .04
y = 3k^.5 The ^ indicates to the power of--in this case to the power of .5 or square root
Steady State saf(k) = (d +n)k
Developed (.28)(3k^.5) = (.04+.01)k
Less-Developed (.10)(3k^.5) = (.04+.04)k
Solve for k. Do not forget how to handle exponents. In this case k divided be the square root of k is equal to the the square root of k
Developed y = 50.4 i = 14.112 c = 36.288
Less = = 11.25 i = 1.125
b. What policies might the less developed country pursue to raise its level of income?
This is a good question and one that could make a great test question. All of the info is in the book so rather than answer this, I will encourage you to explore the answer.