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E-Growth Problem #3 Answers ( points)
Suppose that you are the dictator of this nation, and you have absolute power, including enforcing what age at which people can marry and how many children they can have. Run the model through all six generations. Do this three times, each time pursuing a different goal:
1) Your first goal is to maximize real GDP, not real GDP per capita but with some increase in real GDP per capita. In this case, you want your country to become a world economic and military power without causing too much internal unrest.
First, use the following values:
1) Age of First Marriage: 18 years
2) Average Number of Children: 3
3) Research and Development: 0.2
4) Investment Spending: 35, 45, 55, 65, 75, 85
5) Public Goods Spending: 35, 45, 55, 65, 75, 85
This generates the following results:
1) Population Increase: 50.55%
2) Total Population: 150.55 million
3) Real GDP: $308.37 billion
4) Real Consumption: $76.70 billion
5) Real Consumption Per Capita: $509.45
6) Real Capital Stock: $460.00
7) Real GDP Per Capita: $2048.35
2) For the second time around, you are now a benevolent (for the long term) dictator, so you want to maximize real GDP per capita. You want your citizens to eventually enjoy the highest standard of living possible after the sixth generation, without causing too much hardship in the meantime.
Use the following values:
1) Age of First Marriage: 40 years
2) Average Number of Children: 1.75
3) Research and Development: 0.2
4) Investment Spending: 35, 50, 50, 50, 50, 50
5) Public Goods Spending: 35, 50, 50, 50, 50, 50
This generates the following results:
8) Population Increase: -88.21%
9) Total Population: 11.79 million
10) Real GDP: $175.78 billion
11) Real Consumption: $40.63 billion
12) Real Consumption Per Capita: $3,445.14
13) Real Capital Stock: $385
14) Real GDP Per Capita: $14,906.29
3) For the third time around, you want to be popular all the time. People are clamoring for more consumption, so you want to maximize real consumption per capita at the expense of everything else.
I will use the following values:
1) Age of First Marriage: 40 years
2) Average Number of Children: 1.75
3) Research and Development: 0.01
4) Investment Spending: 1, 1, 1, 1, 1, 1
5) Public Goods Spending: 1, 1, 1, 1, 1, 1
This generates the following results:
1) Population Increase: -96.45%
2) Total Population: 3.55 million
3) Real GDP: $33.60 billion
4) Real Consumption: $31.26 billion
5) Real Consumption Per Capita: $8,798.18
6) Real Capital Stock: $106
7) Real GDP Per Capita: $9,455.62
Write an essay comparing these three goals and policies. How does the chosen age of marriage and number of children differ among the three conflicting goals? Which goal has the highest and lowest amount of spending on research and development, public goods and private investment? Are there ways in which these goals converge, i.e., does the same set of policies achieve more than one goal? Are there ways in which these goals conflict? Explain. Finally, select which of the three goals you personally would want your nation to pursue and explain why. Support your argument with as much facts and economic theory as possible.
If the dictator wants to develop a large economy with lots of potential soldiers and with a large industrial base, and is unconcerned about the standard of living, first, he/she should allow for a fairly high rate of population increase. This allows the labor force to grow so as to provide one of the inputs for industrial production, as well as a supply of soldiers. (Too much population growth might hinder the ability to produce weapons for those soldiers) To accomplish this goal the average age of marriage was set at 18 years and the average number of children at 2. In order to increase the other inputs for industrial production, the dictator should mandate as much spending on research and development and investment and public goods as possible. This spending will provide the technology and capital needed for industrial growth. In line with this analysis, investment started at $35 billion as did public goods spending and both increased by $10 billion every generation. Research and development was set to 20%, the maximum allowed.
With these policies total GDP more than tripled, rising from $100 billion to $308.37 billion. However, there was a drawback to these policies. The increased population provided many more workers for the factories, but also resulted in more mouths to feed. The economic pie got much larger, but there was also a much larger number of people to divide it. Because of diminishing returns (when labor grows faster than other resources), GDP per capita increased only modestly (from $1,000 to $2,048.35) and consumption per capita decreased (from $700 to $509.45). This nation is becoming powerful, but people’s standard of living actually declined. A still larger GDP could have been attained, with a larger population (e.g., by a further decrease in the age of marriage) but then the decline in living standard might have been so great that there would be internal unrest.
For the second case, the only concern was with GDP per capita. The policies involved stringent population control measures. The average age of marriage rose to 40 and the average number of children wanted fell to 1.75. Reducing population, other things being equal, will give each person a larger slice of the economic pie. Partly due to diminishing returns production fell by less than population (and the labor force). To get real output itself to grow larger research and development was set at the maximum allowed (20%). Investment and public goods spending started at $35 in the first generation and increased both to $50 billion for all generations thereafter. This provided the technology, capital, and infrastructure that will cause the economy to grow.
As a result of these policies, real GDP per capita increased over 14 times, rising from $1,000 to $14,906.29. However, there is a drawback to these policies as well. First, people would have to be coerced in order to establish an average age of first marriage at 40 years. This would be a very draconian society to live in. People in this society have a lot of income and wealth, but their actual consumption and quality of life is not reflected in per capita GDP. Because I was spending so much on research and development and investment and public goods, actual consumption per capita increased much more modestly, from $700 to $3,445.14.
Total GDP also increased modestly, from $100 billion to $175.78 billion. This shows an advancing industrial base. However, more importantly, the population of this nation decreased by over 88%. The increase in per capita GDP was largely accomplished by the decrease in population. The economic pie did grow, as evidenced by the increase in total GDP. However, there were so few people that each got a much larger piece of the pie (again, production changed by less than population due to diminishing returns). Because of its small population, this nation might face a loss of political and military power.
In the third case, the dictator wants to improve consumption per capita as much as possible. In line with this, the dictator takes steps to control population. The average age of marriage is 40 years and people are allowed—or are encouraged to have only 1.75 children. People are clamoring for current consumption and any type of investment takes away from that, so research and development is reduced to 1% and investment and public goods spending are held at very low amounts, $1 billion per year for all generations.
These policies provided a huge increase in the standard of living, as measured by consumption by the average person. Real consumption per capita increased by over 1,000 per cent, rising from $700 to $8,798.18. People are now enjoying a wide array of consumer goods and services. However, the total size of the economy has actually declined precipitously, from $100 billion to $33.60 billion. Part of the reason for this is that the capital stock only grew by 6% total over six generations. Public and private infrastructure is a key component of economic growth as measured by the size of the economy.
It is very unusual for an economy to shrink like this, with the increase in the standard of living resulting from a reduction in population from 100 million to 11.79 million. Any economy that shrinks like that is going to experience devastating consequences. How will a nation afford a military force with almost one tenth the population and about one third the size of the economy? It would be like a large nation like the United States had shrunk to the size of Paraguay.
There does not seem to be much overlap between these three goals. Increasing the size of the economy means providing at least maintaining population and investing heavily in research and development, private investment and public works. Increasing per capita GDP means controlling (even reducing) population and investing heavily in research and development, private investment and public works. Improving consumption per capita means controlling population and discouraging research and development, private investment and public works. The only overlap is that spending a lot on research and development, private investment, and public works will increase both total GDP and GDP per capita, other things being equal. Likewise, controlling population will improve both GDP per capita and consumption per capita, as each person will have a larger share of the pie. Otherwise, these are three competing goals with three competing policy prescriptions. None of these societies would be a desirable place to live because they all overemphasize one goal at the expense of all others.