EC102: CLASS 2 LT
Christina Ammon
Essay question
In the lectures we have defined K as capital per worker and Y as
GDP per worker. Let us now call E the efficiency with which
capital is used (a high E might be due to more technical
knowledge in the economy). Define y=Y/E and k=K/E. Call y
“GDP per efficiency unit of labour” and k “capital per efficiency
unit of labour.”
Essay Question a
Suppose that E is constant (there is no population growth either).
Show that there is a steady state where k is constant
 First have to find the law of motion of capital
 Without technological growth given by
Δk=sfk-δk
 Steady State is found when Δk=0
 k* is:
k*=sf(k*)/δ
Essay Question c
In the steady state, is capital per worker K increasing, decreasing,
or independent of E?
 In steady state k is independent on E: k*=sf(k*)/δ
 This is because we defined k such that it is independent of E!
 But capital per worker is given by: K/L=k*E
 => Capital per worker depends positively on E
 But capital per effective worker depends negatively on E!
 If E changes, e.g. doubles => k is halved as k=K/EL and nothing
else changed
 But, k* is unchanged => growth of k until we reach steady state
Essay Question d
Now suppose that E grows at rate g. How does the law of motion
for k change?
 What is the new law of motion?
Δk=sfk-(δ+g)k
 Can just remember this, but need to understand this
Essay Question 1d
Δk=sfk-(δ+g)k
 Here k=K/EL – i.e. the capital per effective worker
 In a way: defined in order for us to be able to solve model
 In this model for the capital per effective worker it doesn’t
matter whether workers become more productive or we have
more workers i.e. E grows or L grows
•
(It matters for capital per worker though! )
 K/L however is increasing in g
Essay Question e
Is there still a steady state where k is constant?
 Yes, as we look at k=K/EL - specifically defined to take
anything out that grows by itself
 Also know that Δk=sf(k)-(δ+g)k
 Find steady state as before – set Δk=0
k=sf(k)/(δ+g)
Essay Question f
In the steady state, is the capital-labour ratio constant?
Question 1
Public policies designed to stimulate technological progress
do not include:
 A. tax breaks to encourage homeownership.
 B. the temporary monopoly granted by the patent system.
 C. tax breaks for research and development.
 D. subsidies given by public funding bodies.
Question 2
Substantial government subsidies to research are justified if:
 A. the private return to research is greater than the social
return to research.
 B. the private return to research is approximately equal to the
social return to research.
 C. the private return to research is less than the social return to
research.
 D. the private return to research is positive, but the social
return to research is negative.
Question 3
In poor economies enforcing intellectual property rights
 a)
Will promote growth by encouraging new discoveries
 b)
Will hinder growth by slowing down the adoption of
technologies developed elsewhere
 c)
Will promote growth by preventing “pirates” from
stealing other firms’ ideas
 d)
Will promote growth by stimulating human-capital
investments
Question 4
Corruption is detrimental to growth because it:
 a)
 b)
 c)
 d)
Reduces private investment
Reduces public investment in infrastructure
Makes the economy less efficient
All of the above
Question 5
If greater human capital leads to faster adoption of new
technologies
 a)
The growth rate of output should be higher in countries
with a higher growth rate of human capital
 b)
The growth rate of output should be higher in countries
with a higher level of human capital
 c)
Richer countries should experience a higher rate of
growth of human capital
 d)
Increases in human capital should be associated with
increases in wages for workers with high human capital