For example queenslands output per capita will be

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Unformatted text preview: er, mean that there are no economic costs. For example, Queensland’s output per capita will be below that of other states for many years before returning to the steady state in the long run. Thus, there will be a considerable amount of lost output due to the floods. (g) Based on your analysis, Treasury is now worried that the other states will feel left out of an economic boom following the floods. Suppose they propose a “cash for clunkers”-like scrappage scheme, as was done in the United States during the Great Recession ( Under this scheme, the government destroys a part of the existing capital stock. Suppose they commit to destroying an additional 10% of the capital stock every year, so that the depreciation rate becomes 0.2 in the other states. What is the implication for growth over the next five years in the other states and their steady-state levels of output? Would you recommend that Treasury pursue this scrappage scheme? The effects of the increase would be the same as depicted in Figure 5.7. I.e., steadystate output will fall from Y* to Y**. 4 We can solve for Y** as before, plugging in the parameter d = 0.2 instead of d = 0.1 0.2( K ! )1/2 = 0.2 K ! S.S. equilibrium: " ( K ! )1/2 = 1 " K! =1 " Y! =1 The growth over the next ten years can be solved as before: Time t Capital Output Investment Depreciation 0 4.00 2.00 0.40 0.80 1 3.60 1.90 0.38 0.72 2 3.26 1.81 0.36 0.65 3 2.97 1.72 0.34 0.59 4 2.72 1.65 0.33 0.54 5 2.51 1.58 0.32 0.50 6 2.32 1.52 0.30 0.46 (d) 7 (k) 2.16 1.47 0.29 0.43 Differences in capital per person cannot explain observed differences in y. This suggests that the assumption of a common level of TFP for all countries is wrong. Using observed data on y and k and the production function implies that there are big 8 2.02 1.42 0.28 0.40 differences in TFP across countries. 9 1.90 1.38 0.28 0.38 (e) If we use ! as the exponent on capit...
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