Week 5

Question 1

Growth accounting equation

Answer 1

gYt = gAt + 1/3gKt + 2/3gLyt

Question 2

5 factors for TFP differences

Answer 2

1. Technology
2. Human capital
   - skills ppl have accumulated over time through…
   - education, which increases productivity
3. Health and nutrition (a type of investment in human capital)
   - healthy workers are more productive
   - STUNTING due to malnutrition
   - Conditional cash transfers can have negative impact on non-beneficiaries
4. Institutions
   - rules in an economy, to foster human capital & technological growth
   eg. PROPERTY RIGHTS, RULE OF LAW, honest, corruption-free gov systems, contract enforcement
5. Misallocation

Question 3

2 viewpoints on allocating the economy’s investment

*3 types of capital: private capital stock, public infrastructure, human capital

Answer 3

1. Equalise tax treatment of all types of capital in all industries & let the market allocate investment to the type with the highest marginal product
2. INDUSTRIAL POLICY: gov should actively encourage investment in certain types of capital or in certain industries (eg. public infrastructure) b/c it may have +ve externalities that private investors don’t consider

Question 4

2 possible problems with industrial policy

Answer 4

1. Government may not have the ability to accurately measure the externalities of diff. economic activities, so may not give correct incentives
2. Politics might be more important than economics behind in influencing which industries get preferential treatment. eg. campaign contributions

Question 5

4 ways to encourage technological progress

…as Big part of increase in TFP over time comes from technological advances.

Answer 5

1. Patent laws
   - grant temporary monopolies; controversial
2. Tax incentives for R&D
3. Grants to fund basic research at universities
4. Industrial policy
   - gov encourage specific industries that are key for rapid tech. progress
   - but Gov bureaucrats might not be the best ppl to understand where tech progress comes from.

Question 6

What are the effects of free trade?

Answer 6

1. Free trade (across countries) INCREASES economic growth.

2. More open to international trade, faster growth. Faster for developing nations thatn developed

Question 7

Charter cities

Answer 7

Economy agrees to set the rules by which a new city is administered. These rules are good for economic growth.

Question 8

3 demographic transitions

Answer 8

1. Fertility rates have a negative correlation with GDP per capita
2. Education/human capital/school years are positively correlated with GDP per capita
   ^Negative relationship with no. of kids and the no. of education level parents want kids to attain, ie. want to have fewer kids but are more educated
3. Women have been increasingly entering job market at a steady pace

Question 9

2 structural transformations

*Each country has 3 broad sectors: agriculture, manufacturing, services

Answer 9

As GDP per capita increases, employment & value added (GDP):

• in agricultural sector, decrease
• in manufacturing, first increase then decrease {hump shape}
• in services, increase

As GDP per capita increases, sectoral productivity growth is:

• in agricultural sector, higher (steep increase)
• in manufacturing, medium (less steep than agri)
• in services, lowest (more or less flat)

^As productivity increases in agricultural sector, no. of workers in agri sector is decreasing.
*In equilibrium, production must be fully consumed (for both agri & non-agri goods)