Economics 3211: Final Exam Information 2005

Economics 3211: Final Exam Information 2015

Date: Monday, December 14, 1:00 - 4:00pm

Location:Ryan Building Room RB1023

Coverage:Emphasis will be on material covered after the midterm however there will be

a few questions on pre-midterm material.

Format:Part 1: Definitions some choice.

Part 2: Longer answer questions: focus on particular models and topic

areas – focus on first half course material. (1 or 2 questions)

Parts 3,4:Longer answer questions drawing mainly on material after the

midterm. (3 or 4 questions)

Some examples of questions on post-midterm material (see midterm and midterm information sheet for examples of questions on first-half material):

1. (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 risingor 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) In the basic Solow model Y/L does not change in the steady-state equilibrium. In practice, even rich economies tend to see their standard of living rise over time. Outline an extension to the Solow model that would have Y/L rise even in the steady state. What determines the growth rate of Y/L in this steady state in the extended version of the model?

(h) Explain and illustratean extension to the basic Solow model that could given multiple steady states.

2.Discuss and compare the effect of population growth on the living standards in:

(i) the Classical (Malthusian) model; and (ii) the Solow model..

(ii) Discuss and compare the effect of a technological improvment in the two models.

3. A resource (land) has two possible uses (A and B). Land has diminishing value of marginal product in both uses. The total amount of land to allocate between the two uses is T*.

(a) Use the resource allocation model to illustrate the efficient allocation of land between the two uses. In your diagram illustrate the total value of output produced when at this efficient allocation.

(b) Say that land is privately owned and that landowners will rent land to the highest bidder. Show the allocation of land between the two uses if the price of land is twice as high in use A as in use B. Is this likely to be in equilibrium? If not, explain what is likely to happen and where the equilibrium will be. What will be the price of land in each of the uses in equilibrium?

(c) Say that custom or government policy says that all of the land in the example above must be used for use A. Show the resulting allocation and how much smaller output in the economy will be than at the efficient allocation.

(d) Market failures could also result in inefficient land allocations. Say that there is only one producer in use A (i.e. the firm using land in use A is a monopolist). How will the likely outcome differ from the efficient allocation? Explain. What would the outcome be if use A is producing a public good? Explain.

4. (a) What are the two sectors in the Lewis dual economy model? How do these two sectors differ?

(b) What does the value of marginal product curve look like in the traditional sector? Why might it have this unusual shape?

(c) Say that the economy starts with 90% of its labour in the traditional sector. Illustrate this situation. In your diagram show the level of wages in each of the sectors, the total value of output (GDP) in the economy and the amount of income going to capitalists.

(d) Lewis argues that the economy in (c) will undergo a transformation. What drives this transformation? Illustrate and explain the process of transformation.

(e) During the transformation described in (d) what happens to: (i) wage rates? (ii) the value of output in

the Modern sector; (iii) income of capitalists; (iv) savings and investment.

(e) What is meant by the “turning point”? What will happen after the turning point? Explain illustrate.

5. (a) In the past few decades China has been among the fastest growing countries in the world. What is

considered a high average annual growth rate in real GDP per person? (give a rough range) At such a

growth rate how long will it take a country’s standard of living to double? (use the “Rule of 72”).

(b) How China performs in the next few decades is an important question.

(i) From the perspective of the Solow model how to you think China will perform?

(ii) What do Acemoglu and Johnson think will happen to China? Explain.

6. (a) What is meant by convergence?

(b) Explain how migration between rich and poor countries might promote convergence (be sure to make reference to both the Solow growth model and the resource allocation model).

7. (a) What kinds of interactions between rich and poor countries might lead to convergence?

(b) Outline the evidence suggesting that openness may promote growth.

(c) What does Robert Allen think about the role of openness in promoting convergence?

8. A country’s savings rate is a key parameter in both the Harrod-Domar model and the Solow growth model. Say that the savings rate rises. What would this do to the growth rate in GDP in the Harrod-Domar model? Explain. What would the rise in the savings rate do to the growth rate of GDP in the Solow model?

9. (a) Early in the course we looked at a variety of indicators and how they differed by a country’s standard

of living. Drawing on this answer the following:

(i) How does the industry structure of a country change as it becomes richer?

(ii) How does inequality vary with the standard of living of a country?

(b) What does the Lewis model suggest happens to income inequality during the process of transformation from a poor to a rich country. Explain.

10. According to the Solow model why are some countries rich and others poor. Explain. Provide diagrams.

11. Explain how growth accounting approaches can be used to measure the sources of differences

in GDP per worker (Y/L) in a country over time.

12. What do Acemoglu and Johnson mean by extractive institutions? Give examples. Explain why extractive institutions may harm a country’s living standards.

13. (a) What might convergence not occur? (b) Outline the savings trap model of non-convergence.