ECON 211 - 2.4
Brayden, George, Mike, Ricky
Introduction
Keep assuming that the labor force
size is fixed at L. Applying the rule of
growth rates, express the growth rate
of output as a function of the growth
rate of capital. Is the model predicted
relationship between output growth
and investment growth observed in
the data? Use Figure 2 constructed in
Question 1 to justify your answer.
Supporting argument
Production function：
Y = AKαL1 -α
Labor force (L) & TFP (A) are
constant.
After derivate, the equation is
comes to:
gY = 0 + α · gK + 0 = α · gK
The equation suggest that
there is linear relationship
between the capital growth
(Investment growth rate) rate
and the output growth rate.
Counter argument / rebuttal
●
Labour force varies
●
TFP doesn’t remain constant
Conclusion
●
Theory doesn’t always equal reality.
●
Allowing for more variables will give a more accurate estimate for GDP growth.