ECON 1210 2021 Problem Set 8
Chapter 12 and Chapter 13
1. Suppose the US economy is characterized by the following equations:
1 2
Production Function: Y = K 3 (AN ) 3
Steady State Condition: I = (δ + gA + gN )K
(a) Write the per effective worker production function.
(b) Write the per effective worker steady state condition.
(c) Solve for steady state capital per effective worker.
(d) Solve for steady state output per effective worker.
K
(e) Draw the Solow Diagram in effective units. Label your horizontal axis AN .
K∗
Start in steady state. Label this steady state AN and label the corresponding
Y∗
output per effective worker AN . Draw the impact of a decrease in the saving
K0 Y0
rate on the diagram. Label AN and AN at the time of the change. Label capital
per effective worker and output per effective worker at the final steady-state
K∗ Y2∗
point AN2 . and AN .
K
(f) Draw the Solow Diagram in effective units. Label your horizontal axis AN .
K∗
Start in steady state. Label this steady state AN and label the corresponding
Y∗
output per effective worker AN . Draw the impact of a decrease in the growth
K0 Y0
rate of technological progress, gA on the Solow Diagram. Label AN and AN
at the time of the change. Label capital per effective worker and output per
K∗ Y2∗
effective worker at the final steady-state point AN2 . and AN .
(g) Discuss the impact of a decline in the saving rate on the growth rate of output
and the growth rate of output per worker in the long run.
2. Suppose the US economy is characterized by the following equations:
1 1
Production Function: Y = K 2 (AN ) 2
Steady State Condition: I = (δ + gA + gN )K
(a) Write the per effective worker production function
(b) Write the per effective worker steady state condition
1
(c) Solve for steady state capital per effective worker
(d) Solve for steady state output per effective worker
(e) Suppose δ = .10 and s = .16, gA = .04, and gN = .02. Find steady state
capital per effective worker, output per effective worker, the growth rate of
output per worker, and the growth rate of output.
(f) Suppose δ = .10 and s = .16, gA = .08, and gN = .02. Find steady state
capital per effective worker, output per effective worker, the growth rate of
output per worker, and the growth rate of output.
(g) Draw the change from 2e and 2f on the Solow Diagram with capital per effective
worker on the horizontal axis
(h) Discuss the growth rate of output and growth rate of output per worker
in the long-run moving from 2e to 2f
3. The following Table include data from the Penn World Tables 9.0 (LS stands for
labor share, which is the exponent on effective labor in the production function):
2000 2014
Y K N LS Y K N LS
US 13031820 35997032 139.2961 0.642679 16598099 52849892 148.4634 0.603597
China 5108341 11468023 717.395 0.599299 17135952 69379696 798.3678 0.567239
(a) Fill out the following table:
gY gN gK Average Labor Share gK-gN Residual
US
China
(b) Is capital per working rising or falling in China? What about the US?
(c) Which country has the largest residual?
4. How might the policy changes in the following scenarios affect the wage gap between
low-skill and high-skill workers in the United States?
(a) Increased spending on computers in public schools.
(b) An increase in the number of public colleges.
(c) Tax credits in Central America for US firms.
(d) Subsidies paid to business to introduce robots into the production process.
2
5. Use the tables on the pages that follow to answer the questions below. The first ta-
ble is from the Penn World Tables (LS stands for labor share which is the exponent
on effective labor in your production function). The next table is the Unemploy-
ment rate from FRED for workers ages 16-24 without a college degree.
(a) Compute the average annual growth rates of Y, N, and K between 1985 and
1999. Calculate the Solow Residual
(b) Compare your result of the Solow Residual with the 2000-2014 period for the
United States computed in question 3
(c) Calculate the average unemployment rate of this group from: 1985-1999, 2000-
2018 and 2017-2018.
(d) Comment on the three unemployment rates calculated above. Does the result
support the proposition that more rapid technological change increases the
unemployment rate of low-skill workers? Why specifically look at the years
after 2017?
3
1985 1999
Y K N LS Y K N LS
7860199 23116866 111.4718 0.608186 12510232 34374992 137.3371 0.631764
4
Year Unemp-Rate For HS Graduates with No College 16-24
1985-01-01 12.6
1986-01-01 12.4
1987-01-01 10.7
1988-01-01 10.2
1989-01-01 10.1
1990-01-01 10.4
1991-01-01 12.7
1992-01-01 14.0
1993-01-01 13.1
1994-01-01 11.9
1995-01-01 12.2
1996-01-01 12.1
1997-01-01 11.1
1998-01-01 10.4
1999-01-01 9.9
2000-01-01 9.5
2001-01-01 10.9
2002-01-01 12.9
2003-01-01 13.7
2004-01-01 12.7
2005-01-01 12.3
2006-01-01 12.2
2007-01-01 12.0
2008-01-01 14.7
2009-01-01 21.5
2010-01-01 22.5
2011-01-01 21.3
2012-01-01 20.3
2013-01-01 18.9
2014-01-01 16.4
2015-01-01 14.3
2016-01-01 12.6
2017-01-01 11.1
2018-01-01 10.3