Figure I
World Income Distribution, 1960 and 1988
0.02
0.018
0.016
0.014
0.012
0.01
0.008
Density of Countries
0.006
0.004
0.002
0
L
.01 .62 .64 .08 .16 .32 .64
GDP Per Worker Relative to the US. (log scale)
1 Figure 3
Density of GDP Per Worker Weight
Problem Set 4
MSU EC 410
Prof. Ahlin
due 11/22/16
1. Imagine there are two types of potential borrowers in a village, those with pi=0.7 and those with pi=0.9. As
in the adverse selection model discussed in class, these borrowers succeed with probability p
Problem Set 3
MSU EC 410
Prof. Ahlin
due 11/8/16
1a.
Use the H-augmented Solow model to determine the a) instantaneous impact on GDP per capita, b)
instantaneous impact on consumption per capita, c) long-run impact on GDP per capita, d) long-run impact on
Problem Set 3 Answers
MSU EC 410
Prof. Ahlin
due 11/8/16
1a.
Use the H-augmented Solow model to determine the a) instantaneous impact on GDP per capita, b)
instantaneous impact on consumption per capita, c) long-run impact on GDP per capita, d) long-run i
Problem Set 4 Answers
MSU EC 410
Prof. Ahlin
due 11/22/16
1. Imagine there are two types of potential borrowers in a village, those with pi=0.7 and those with pi=0.9. As
in the adverse selection model discussed in class, these borrowers succeed with proba
Ex.
If Ghanas GDP per capita is $300, Y = 96 K1/3N2/3, s = 10%, n = 3%, and d = 7%.
what savings rate would maximize long-run GDP per capita?
s=1
What savings rate would maximize long-run consumption per capita?
c* = (1s)y*
c* = (1s)A[sA/(n+d)]1/2
s = 0%
Theory <> Evidence Policy
Testing the models
A)
Convergence
Approaches:
Long horizon examining a few countries over a long period of time
Short horizon examining many countries over a short period of time
Unconditional convergence: countries converge in G
Real world Case 1b) Lender does not know risk.
Lender must charge everyone the same interest rate, r.
Risky borrowers have lower expected repayment, because
they pay back the same loan, only less often.
In essence, failure is subsidized.
Ex. If r = 20%,
Helps solve Limited Enforcement problem: raising borrowers
incentives to repay in order to maintain future borrowing prospects
Consider a Limited Enforcement framework. Will borrower
repay if he can?
B(rt+1, Lt+1, rt+2, Lt+2, . rT, LT) = net present value
Expected repayment:
pipj (1+r)L + pi(1pj)[(1+r)L + bL] =
pi(1+r)L + pi(1pj)bL
pi[1+ r + (1pj)b] L
very similar to expected repayment under individual loans:
pi(1+ r)L
Can define an analogous effective interest rate under group
lending:
~
r
= r + (1pj)b
It
Practice Midterm 1 Answers
MSU EC 410
Prof. Ahlin
60 minutes/total points
Choose the best answer.
1. (1) The Harrod-Domar and Solow models disagree on which one of the following points:
a. a one-time increase in total factor productivity (A) will increase
PRODUCTIVITY A
What is A?
A is called total factor productivity
An increase in A increases production directly by increasing efficiency of use of inputs
Technology interpretation:
A includes ideas, patents, blueprints, knowledge, intellectual property, et
Problem Set 2
MSU EC 410
Prof. Ahlin
due 10/15/15
1. Consider a country in which Y = 200 K2/5N3/5. Assume in this country they save 20% of
their income, population grows at 3% per year, and depreciation of capital occurs at 10% per
year. Use the Solow mod
Problem Set 1 Answers
MSU EC 410
Prof. Ahlin
due 9/27/16
a. 1a.
If the exchange rate does a perfectly good job equating prices of traded goods, we know
the price of boats is the same in both countries, after accounting for currency exchange. In other word
Problem Set 1
MSU EC 410
Prof. Ahlin
due 9/27/16
1. Two fictitious countries, Bigsea and Tadloch, produce only two products: boats, which are traded
internationally, and seafood restaurant meals, which are not. The countries have equal populations. Bigsea
Problem Set 2
MSU EC 410
Prof. Ahlin
due 10/13/16
1. Consider a country in which Y = 200 K2/5N3/5. Assume in this country they save 20% of
their income, population grows at 3% per year, and depreciation of capital occurs at 10% per
year. Use the Solow mod
3-
A temporary increase in the GDP/capita growth rate, and a permanent increase in long-
run GDP/capita level, results from a (permanent) increase in s, A, or a decrease in n (Show
graphically; contrast to H-D)
4-
long-run GDP growth rate equals n
Since Y
GRAPHICAL APPROACH to H-D model
Since yt = Akt, then gy = gk. So,
gk = kt/kt = sA n d
kt = sAkt (n+d)kt
actual investment/ break-even investment
GRAPH
1)
What if s varies with y?
Poverty trap: low income low growth low future income
Savings-based poverty
Variables
National Level:
Yt
national income (GDP) at time t
Kt
national capital stock at time t [equipment]
A
total factor productivity [techniques]
A embodies knowledge, ideas, and methods of organizing inputs into output
Nt
population at time t
Ct
nati
We will bury you
3)
What if MPK varies with y?
Solow Model:
Same as Harrod-Domar except production function changes:
1)
Yt = AF(Kt,Nt)
Now labor and capital matter for how much is produced
Key Assumption:
F exhibits constant returns to scale
F(zK,zN) = zF
Economic Growth
I)
Growth Calculations
Small differences in growth rates add up
Ex.
Australia vs. Japan
US vs. UK
1870
GDP/cap.
1999
GDP/cap.
Ratio
Avg. Annual
(1999 $)
(1999 $)
1999/1870
Growth
$4,775
$20,050
4.2
1.12%
$884
$32,230
36.5
2.83%
U.K.
$3,463
?
Policy Implications of this model:
IF THE GOAL IS TO INCREASE GROWTH RATE
Increase the savings rate.
Government saving tax, and invest in firms or public capital (e.g. Soviet Union)
Reduce taxes on saving/investing (assuming elastic)
e.g. capital gains
Practice Final
Econ 330 Aeimit Lakdawala
(Note: The final is cumulative but the practice problems here only cover material after the second midterm.)
Multiple Choice Questions:
1) Why are many economists skeptical of the Fed's ability to fine tune the eco