QUIZ 6 Solution

QUIZ 6 Solution - ECO 407 Macroeconomic Theory Grade:_...

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ECO 407 Macroeconomic Theory Name:__________________ Grade:______________ QUIZ 6 Part I [45 points] 1. The Solow model implies that differences in total factor productivity are even more important in explaining differences in income across countries than the production model of Chapter 4 suggested. Why? This happens because the differences in capital are explained in part by differences in investment rate s and in part by differences in the productivity parameter A . That is, some of the differences we observe in capital per person across countries are themselves due to differences in productivity. This means that the Solow model gives an even larger role to TFP than our production model did 2. What happens when we compare the solution for output per person obtained the Solow model with the solution obtained from the production model. Please mention the similarities and the differences between those two equations. The solutions are similar in that a higher productivity level A raises the long-run level of output per person in both cases. Also, both equations include a contribution from capital per person. In the Solow model, this contribution shows up in the fact that we have endogenized the level of capital per person, capital per person in the steady state depends on the investment rate ( s ), productivity ( A ), and depreciation ( d ). These are the terms that appear in equation for the output per worker in the steady state in place of k . An interesting difference between these two equations is the role of the productivity parameter A . In the production model, it enters with an exponent of 1, while in the Solow model it enters with an exponent of 3/2. This happens because the level of the capital stock itself depends on productivity. In the Solow model, a higher productivity parameter raises output directly just as in the production model. But there is an additional effect in the Solow model. The higher productivity level leads the economy to accumulate more capital as well. This explains the larger exponent in the Solow framework.
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This note was uploaded on 04/07/2008 for the course PHI 407 taught by Professor Monterio during the Spring '08 term at SUNY Buffalo.

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QUIZ 6 Solution - ECO 407 Macroeconomic Theory Grade:_...

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