Economics 3211: Midterm Information

Date: Monday, October 23, 2017 (25% of mark)

Format: Part 1: Definitions some choice: be brief and to the point.

Part 2: Questions with focus on particular models and topic

areas (see examples of past questions below).

Coverage: Material from the start of the course up to end of Overhead Set 5 (Capital Accumulation and Growth) model in Overhead Set 5 (dev17e.docx). Questions based on material from Assignment 1 are also possible (so review Allen’s book as well).

The following are intended to give you some idea of the types and formats of the questions ask.

1. (a) Discuss how a Poor country economy differs from a Rich country economy.

(b) Who are the current rich countries? Who are the current poor countries? About how large

are the differences in living standards between the two groups of countries?

2. (a) Describe the evolution of the average standard living from pre-history to about 1800.

(b) How would the Classical economists explain this? As part of your model thoroughly

explain how the model works and provide diagrams as part of your answer.

(c) In the Classical (Malthusian model) why might one country be richer than another country?

What strategies would a country need to adopt to raise its standard of living?

3. (a) Say that there are constant returns to scale so that an economy’s production function can

be written as: Y/L = F(K/L,1) (Y=GDP, L=labour, K= capital stock). Also assume that this production function has diminishing returns. Graph it.

(b) Use a diagram like that in (a) to illustrate three reasons why one country may be richer than another country. (c) What determines productivity? Give examples. (d) How does allocation of inputs affect GDP?

4. The Cobb-Douglas production function has the following form: Yt = A Kta Lt1-a

where Y = GDP, K = the quantity of physical capital, L= the quantity of labour (the subscripts t denote that these are the values at time t). a is assumed to be between 0 and 1.

(a) What does A measure? (b) If input markets are competitive how can a measured?

(c) Define constant returns to scale. Show that the Cobb-Douglas has constant returns to scale.

(d) Express the Cobb-Douglas in per worker terms (per unit L).

(e) Take the logarithm of the Cobb Douglas production function in per worker terms. Use it to derive an expression that breaks down growth in Y/L into components due to accumulation and productivity growth (assume a is constant).

5. (a) What did Solow find in his growth accounting study? Outline how he obtained this result.

(b) How did Solow’s results compare to those obtained by Young for the East Asian miracle countries?

6. GDP (Y) can be measured as the sum of spending on final goods and services:

Y = C + I + G + X – M

Following the presentation in the class notes, show how Investment spending depends on three

sources of savings. Using this results suggest three policies that might raise investment spending.

7. Outline the model Lucas used to simulate the state of the world economy in 2100. What did he find?

8. (a) What form does the aggregate production function take in the Harrod-Domar model? What is the intuition behind this function. Represent this production function in a graph i.e. show the isoquants for this function. (b) What does the model assume about the amount of labour in the economy? (b) Derive the GDP growth rate equation for the Harrod-Domar model (explain your steps and the assumptions of the model). (c) If you wanted to double a country’s growth rate what would you have to do? How might you do it?

9. (a) In the Solow model output (Y) is a function of the amount of capital (K) and the amount of labour (L)

used in production: Y = F(K, L).

(i)It is usually assumed that this production function has constant returns to scale in K and L: what is

meant by constant returns for scale? What does the assumption imply about what determines Y/L?

(ii) It is also assumed in the Solow model that the production function has diminishing returns. What

does this imply for its shape?

(b) In the Solow model, how the economy evolves over time depends on whether the capital-labour ratio (K/L) is rising or falling.

(i) Why does that capital stock change over time in the Solow model? On what parameters does the size of this change depend? Give the relevant expression for the change in the capital stock and explain it.

(ii) What does the model assume about labour force growth?

(iii) How much capital growth is required per period to keep the capital-labour ratio constant? Explain.

(c) In the graphical version of the model whether K/L is rising, staying the same or falling depends on whether the amount of actual capital growth per worker exceeds, equals or is less than the amount of capital growth required to maintain the current capital-labour ratio. Illustrate the actual and required capital growth relations in your diagram.

(d) Indicate the steady state level of output per worker and capital per worker. Explain why the economy would move to this steady state if it started with a lower than steady state level of K/L.

(e) (i) Say that the savings rate rises. Illustrate the effect of this change on the steady state.

(ii) What happens if the labour force growth rate falls? Explain and illustrate.

(iii) Explain and illustrate the effect of a technological improvement.

(f) Use the Solow model to explain why some countries are poorer than others.