(a) Consider an economy that is initially in a steady state equilibrium. Assume that in this equilibrium it has a saving rate of 50 per cent and a depreciation rate of 2 per cent. Further assume that the population growth rate is 3% and that the level of output produced can be represented by the following production function: = where A = 1 and = 0.5. Use the Solow-Swan model to determine the level of capital per worker and output per worker in this economy. (1 mark) (b) Now suppose the government introduces a set of policies to improve the institutional set up as well as better production technique which increases total factor productivity by double. What is the new steady state level of capital per worker and output per worker? (1 mark) (c) Use a Solow-Swan diagram to show the qualitative effects of this new government policy upon steady state output per worker and capital per worker. Briefly describe the intuition behind this result. (1 mark) (d) Now suppose, population growth rate increases along with increase in productivity. Using the Solow-Swan diagram explain why this might reverse the result in part (c). (1 mark) e) (i) What is growth accounting? Assuming a production function, Y = A f (k, l), provide an intuitive explanation for the following equation. Define all terms. Y = A + rk Af(k. l) k + wl Af(k, l) l (ii) Consider the following statement, made by a leading economic commentator about China. China has historically maintained a high rate of savings. When reforms were initiated in 1979, domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during this period were generated by the profits of SOEs, which were used by the central government for domestic investment. Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings as well as corporate savings. As a result, China's gross savings as a percentage of GDP is the highest among major economies. The large level of domestic savings has enabled China to support a high level of investment. In fact, China's gross domestic savings levels far exceed its domestic investment levels, which have made China a large net global lender. Source: Congressional Research Service Using the growth accounting equation in part (i) explain the main contributing factor(s) of recent growth in China

(a) Consider an economy that is initially in a steady state equilibrium. Assume that in this equilibrium it has a saving rate of 50 per cent and a depreciation rate of 2 per cent. Further assume that the population growth rate is 3% and that the level of output produced can be represented by the following production function: = where A = 1 and = 0.5. Use the Solow-Swan model to determine the level of capital per worker and output per worker in this economy. (1 mark) (b) Now suppose the government introduces a set of policies to improve the institutional set up as well as better production technique which increases total factor productivity by double. What is the new steady state level of capital per worker and output per worker? (1 mark) (c) Use a Solow-Swan diagram to show the qualitative effects of this new government policy upon steady state output per worker and capital per worker. Briefly describe the intuition behind this result. (1 mark) (d) Now suppose, population growth rate increases along with increase in productivity. Using the Solow-Swan diagram explain why this might reverse the result in part (c). (1 mark) e) (i) What is growth accounting? Assuming a production function, Y = A f (k, l), provide an intuitive explanation for the following equation. Define all terms. Y = A + rk Af(k. l) k + wl Af(k, l) l (ii) Consider the following statement, made by a leading economic commentator about China. China has historically maintained a high rate of savings. When reforms were initiated in 1979, domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during this period were generated by the profits of SOEs, which were used by the central government for domestic investment. Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings as well as corporate savings. As a result, China's gross savings as a percentage of GDP is the highest among major economies. The large level of domestic savings has enabled China to support a high level of investment. In fact, China's gross domestic savings levels far exceed its domestic investment levels, which have made China a large net global lender. Source: Congressional Research Service Using the growth accounting equation in part (i) explain the main contributing factor(s) of recent growth in China

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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