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Intermediate Macroeconomics Heman Das Lohano Assignment 2: Due On 17 May 2020 Instructions

This document is an assignment for an intermediate macroeconomics course. It contains 6 questions regarding Solow growth model concepts like GDP accounting, loanable funds market equilibrium, state equations, steady states, and effects of population growth, technological progress, and savings rates. Students are instructed to show all work, write legibly, and submit individually without sharing to avoid plagiarism.

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Mustafa Q Shamim
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© © All Rights Reserved
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48 views

Intermediate Macroeconomics Heman Das Lohano Assignment 2: Due On 17 May 2020 Instructions

This document is an assignment for an intermediate macroeconomics course. It contains 6 questions regarding Solow growth model concepts like GDP accounting, loanable funds market equilibrium, state equations, steady states, and effects of population growth, technological progress, and savings rates. Students are instructed to show all work, write legibly, and submit individually without sharing to avoid plagiarism.

Uploaded by

Mustafa Q Shamim
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Intermediate Macroeconomics Heman Das Lohano

Assignment 2: Due on 17 May 2020


Instructions:

 Answer all questions. Show your work while answering the questions.
 Complete the assignment in readable handwriting. Write your name on each page.
 Submit the color scan copies of handwritten answers on LMS.
 There are two assignments in place of mid-term exam. This is the second one. Thus, solve
this assignment on your own and do not share your work with other students.

Q1: (20 marks)


(a) Define GDP.

(b) GDP = C + I + G + X – IM. In GDP accounting, why are imports (IM) subtracted? Justify
your answer based on the definition of GDP.

(c) An airline company in Pakistan purchases some used airplanes from a foreign country. Is
this transaction included in GDP accounting system (GDP = C + I + G + X – M)? Yes or
No? Explain briefly.

(d) Write the equation of equilibrium in loanable funds market for (i) closed economy and (ii)
open economy.

Q2: (40 marks)


The aggregate production function of an economy is specified as follows:

𝑌 = 𝐴𝐾 𝛼 𝐿1−𝛼

where Y is output (real GDP), K is the amount of capital, and L is the amount of labor. Assume
a Solow-Swan model with population growth and no technological change. The economy’s
saving rate is denoted by s, and the capital depreciation rate is denoted by 𝛿. Population and
labor force (L) grow at a constant rate n. Denote the per worker quantities as k = K/L, y = Y/L,
c = C/L, and i = I/L.

(a) Write the equation of equilibrium in loanable funds market in the economy (this
equilibrium holds each year). Write the state equation (also called the equation of motion)
for capital (K) and the state equation for labor (L).

(b) Suppose we have 𝛼 = 0.5, A = 2, 𝛿 = 0.05. Country A has: n = 0.01, and s = 0.3. Suppose
the economy is in the transition stage, where K = 100 and L = 100 in year 1 (t = 1). Using
the equations from part (a) and other relevant functions and parameter values, compute K,
L, Y, C, I, depreciation and change in K for 5 years:

Year K L Y C I δK ∆K
1
2
3
4
5

(c) Write the state equation for capital per worker (k = K/L). Write the production function for
output per worker (y = Y/L).
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(d) Using the above equations and given parameter values, compute k, y, c, i, depreciation per
worker, and change in k for 5 years:

Year k y c i δk ∆k
1
2
3
4
5

(e) Define the steady state capital per worker. Using the state equation for k found above, find
the steady state capital per worker (k) as a function of 𝛿, n, s, A and 𝛼. Find the steady state
output per worker (y) as a functions of 𝛿, n, s, A and 𝛼.

(f) Suppose we have 𝛼 = 0.5, A = 2, 𝛿 = 0.05. Country A has low population growth rate and
high saving rate: n = 0.01, and s = 0.3. Country B has high population growth rate and low
saving rate: n = 0.03, and s = 0.2. Find the steady state levels of k and y for each country
and compute their ratio between country A and country B: kA/kB and yA/yB. Interpret and
briefly explain the results.

(g) What is the annual growth rate of each economy (real GDP) at the steady state? Briefly
explain.

Q3: (40 marks)


Suppose an economy has the following production function with labor-augmenting
technological change:
𝑌 = 10𝐾 𝛼 (𝐿𝐸)1−𝛼

where Y is output (real GDP), K is the amount of capital, L is the amount of labor, and E is the
efficiency of labor. Assume a Solow-Swan model with population growth and technological
change. The economy’s saving rate is denoted by s, and the capital depreciation rate is denoted
by 𝛿. Population and labor force (L) grow at a constant rate n, and efficiency of each unit of
labor (E) grows at constant rate g. Denote the per effective worker quantities as k = K/LE, y =
Y/LE, and c = C/LE.

(a) Write the state equations for capital (K), labor (L), efficiency of each unit of labor (E), and
capital per effective worker (k).

(b) Define the steady state capital per effective worker. Using the state equation for k found
above, find the steady state capital per effective worker as a function of 𝛿, n, g, s, and 𝛼.

(c) Find the steady state output per effective worker (y) and consumption per effective worker
(c), as functions of 𝛿, n, g, s, and 𝛼.

(d) Suppose we have 𝛼 = 1/3, 𝛿 = 0.1, n = 0.01, g = 0.03 and s = 0.35. Find the steady state
levels of k, y and c.

(e) At the steady state, what is the annual growth rate of (i) the economy (real GDP), (ii) per
worker GDP, and (iii) per capita GDP? Briefly explain.

(f) Define Golden Rule steady state. Find the Golden Rule steady state levels of k, y and c.
Compare the results with those found in part (d) and briefly explain.

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