Hans Memling, Diptych of Martin van Nieuwenhove

| June 19, 2015

Intermediate Macroeconomics II

PART 1-5%

1.   In a neo-classical growth model, production  is governed by the production function, y = k
1/2
,
where y=Y/N and k=K/N are, respectively, output and  capital (both expressed per capita).  In the
first year of analysis, the economy has an empl oyed labour force of 100,000 and a capital stock
of 1,600,000 units.  The growth rate, N, of the labour force is 10%; and the savings rate, s, is
40%. Assume no depreciation and no technological progress

a.   Calculate the initial values of y and k.  Verify  that the economy is on a balanced growth path.

b.   Suppose the savings rate rises to 50%.  Calculat e the values of y, k, actual investment (sy),
and balanced-growth investment (nk) for the next year.  (Hint: k
1
=  k
0
+  nk
0   )

2.   Explain what happens to capital and output in the  short run and in the long run if the technological
growth rate decreases.

Identify two countries of your choice, one that has recently experienced relatively strong and robust
economic growth and one that has had relatively we aker economic growth. Find some economic data on
both countries that you think could inform an analysis of  differences in the economic growth rates of both
countries. Such data might include GDP per capita  measured in common currency, e.g. US dollars),
unemployment rates, human capital development index, literacy rate, population growth, index of
economic freedom, level of investment, savings rate, inflation rates, etc.

Required:
Prepare a report that is designed to evaluate how the differences in the economic growth in both
countries can be reconciled with your knowledge  of theories of economic growth. You should use
economic data you gathered on both countries to justif y your answers.  While you are free to structure
your report as you feel appropriate, it should include:
1.   discussion of the economic conditions of both countries
2.   appraisal of how growth theory can explain di fferences in the economic grow rates of both
countries using data you gathered (You can present some of this data in graphical or table form.)
3.   whether the strong growth country prospects  for continued strong economic growth might be
limited; and, if so, what policy you would recommend to offset this?
4.   whether the weak growth country prospects for growth will be further limited; and, if so, what
policy you would recommend to offset this?
Econ 2480 – Intermediate Macroeconomics II    2
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