solow model, Macroeconomics

Assignment Help:
Q1. The poorest countries in the world have a per capita income of about $600 today.
We can reasonably assume that it is nearly impossible to live on an income below half
this level (i.e., below $300). Per capita income in Australia in 2010 was about $60,000.
With this information in mind, consider the following questions.
(a) For how long is it possible that per capita income in Australia has been growing
at an average annual rate of 2% per year? (2 points)
(b) Some economists have argued that growth rates are mismeasured. For example, it
may be difficult to compare per capita income today with per capita income a
century ago when so many of the goods we buy today were not available at any
price. Suppose the true growth rate in the last two centuries was 3% per yearrather than 2%. What would the level of per capita income in 1850 have been in
this case? Is this answer plausible?



Q3. In this question, we are going to do some “normative” economics (i.e., “what ought
to be”) instead of “positive” economics (i.e., “what is”). Specifically, we will examine
whether the six countries in Q2 are investing too little or too much for the benefits of
their future generations. For this question, again consider the Solow model with labour
share of 2/3rds.
(a) Show mathematically that steady-state consumption per capita can be expressed
as c* = A(k* )1/3 - dk* . Show your workings. (2 points)
(b) Maximize steady-state consumption with respect to steady-state capital per
capita—i.e., solve for ?c*
?k* using the chain-rule in calculus that ?y
?x
= axa-1 for a
function y = xa . Denote the steady-state level of capital per capita that maximizes
steady-state consumption per capita as kGR , where GR denotes “Golden Rule”
(see below). What is kGR as a function of the productivity parameter and the
depreciation rate? (2 points)
(c) Noting that steady-state capital will always be k* =
sA
d
!
" #
$
% &
3/2
for this model (why?),
what s will maximize steady-state consumption (i.e., what value for s will make
k* equal to the steady-state capital per capita that you solved in part (b))? (2
points)
(d) Macroeconomists refer to the value of s solved for in part (c) as the “Golden
Rule” (i.e., “Do unto others,…”) investment rate. The idea is that investment at
this rate will maximize consumption for future generations. Meanwhile, a lower
investment rate means that households are consuming more today at the expense
of future generations, while a higher investment rate means that all generations
are investing too much and not enjoying consuming enough of the fruits of their
labours. Based on the solution in part (c) and the investment rates in Q2, which
countries are investing too little, too much, or just right, at least according to the
Solow growth model and the Golden Rule investment rate? (2 points)

Related Discussions:- solow model

Factors affecting the price elasticity of demand, Q. Discuss about the fact...

Q. Discuss about the factors affecting the Price Elasticity of Demand. a. Availability of Substitute- Availability of close substitute is important determinants of elasticity of

Population growth is greater than the growth of real output, If population ...

If population growth is greater than the growth of real output, A. real per capita Gross Domestic Product (GDP) growth will be less than the growth of real Gross Domestic Product

Evaluate the additional social loss, A monopoly has a total cost function o...

A monopoly has a total cost function of C(Q) = 8Q and faces a market demand Q = 100 ? 2p, (a) calculate the deadweight loss; (b) The firm now spent an amount equal to half of

Kernel density estimator to plot the two densities, The data is posted on B...

The data is posted on Blackboard. Download the data lfs4.dta on your personal computer. This data is from the Labour Force Survey 2003. In STATA, add enough memory to open the data

Determine the optimum prices and outputs-probability, Given the following: ...

Given the following: Airbus Boeing Demand P = 182.868 - 0.0003Q P = 198.6592 - 0.00013Q TVC Curve TVC = 104.8822Q - 0.001Q^2 + 0.09Q^3 TVC = 25.8678Q - 0.00023Q^2 + 0.4Q^3 In

Interdependence of macroeconomics and microeconomics , INTERDEPENDENCE OF M...

INTERDEPENDENCE OF MACROECONOMICS AND MICROECONOMICS In microeconomics, the underlying assumption is that the total output, total employment and total spending are given. It th

Fdi inflows - an appraisal, FDI Inflows - An Appraisal: A comparison o...

FDI Inflows - An Appraisal: A comparison of the magnitude of FDI inflows received by India would appear too small, especially when compared to the inflows received by other co

Rice production is land intensive, If rice production is land intensive and...

If rice production is land intensive and computer production is labor intensive, though both good require some land and labor, the two-good production possibilities frontier will c

Mutual funds was taken, A sample of 57 mutual funds was taken and the mean ...

A sample of 57 mutual funds was taken and the mean return in the sample was 14.1% with a standard deviation of 9.2%. The return on a particular index of stocks (against which the m

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd