Growth Accounting –India

Question 1- Solow Model with a Fixed Factor

Consider the Solow growth model (savings rate is exogenous) with the following aggregate production function

 

;

 

where Z is land. The supply of land is fixed. Assume that  < 1, capital depreciates at rate δ, and there is an exogenous savings rate of s.

 

1. Suppose there is no population growth rate. Find the steady state capital-labor ratio and the steady-state output per worker. Interpret the expressions.
2. Now suppose population grows at rate gN. What happens to steady state capital-labor ratio and output per worker? What does this imply when gN becomes a very large number? Interpret the expressions.

 

Question 2 – Growth Accounting –India

In this exercise you will carry out growth accounting for India for the period 1980-2003. The data is provided below.

 

The variables (from the first column to the last one) are as follows: 1.t- Year 2.

Y – Aggregate Real GDP, 3. K-Aggregate Capital Stock, 4. N:-Aggregate Employment

 

Suppose the production function for the aggregate economy is given by

;

where A is the Solow residual. Assume α = 1/3.

 

1. Use the data on aggregate GDP (Y), aggregate capital (K) and aggregate employment (N) to generate the Solow residual. Then, compute the contribution of growth, from 1980 to 2003, in aggregate capital, aggregate employment and in Solow residual to account for the growth in aggregate GDP. What is the source of growth in India’s GDP?
2. Take the production function in the first part and redo the growth accounting exercise with α= 0. Compare your results with those in part 1, and interpret the change in results.

 

Year	Y	K	N
1980	372373	905948.7	2.2E+08
1981	401128	944265.3	2.26E+08
1982	425072	988245	2.33E+08
1983	438079	1050137	2.4E+08
1984	471742	1101336	2.46E+08
1985	492077	1147762	2.53E+08
1986	513990	1208254	2.61E+08
1987	536257	1276005	2.72E+08
1988	556778	1343211	2.79E+08
1989	615098	1394053	2.86E+08
1990	656332	1468858	2.93E+08
1991	692871	1545813	3.01E+08
1992	701863	1625952	3.08E+08
1993	737791	1718182	3.16E+08
1994	781345	1799651	3.19E+08
1995	838031	1892475	3.22E+08
1996	899563	2014541	3.25E+08
1997	970083	2176816	3.29E+08
1998	1016594	2327369	3.33E+08
1999	1082747	2457023	3.37E+08
2000	1148367	2579242	3.4E+08
2001	1198592	2691990	3.43E+08
2002	1267945	2805577	3.47E+08
2003	1318362	2915393	3.54E+08

 

 

Question 3- Solow growth model

1. Graphically illustrate and explain the effects of an increase in the rate of depreciation (δ) on the Solow growth model. In your graph, clearly label all curves and equilibria.

 

1. Suppose policy makers wish to increase steady state consumption per worker. Explain what must happen to the saving rate to achieve this objective.

 

Question 4- Solow growth model

Graphically illustrate and explain the effects of a reduction in the saving rate on the Solow growth model. In your answer, you must clearly label all curves and the initial and final equilibria. In your answer, explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this decrease in the saving rate.

 

 

Question 5- Technological Progress: The Short, the Medium, and the Long Run

Using the AS/AD model, graphically illustrate and explain the short-run and medium-run effects of a reduction in productivity. In your graph, clearly label all curves and equilibria. For simplicity, assume that the change in productivity has no effect on aggregate demand.