1 Growth accounting exercise (20 points total) Imagine that your top manager is about to give an...

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1 Growth accounting exercise (20 points total) Imagine that your top manager is about to give an important presentation to a group of OECD executives about the growth experience of two countries, Australia and Canada. Your manager is always busy and relies on you, one of his best researchers, to do the analysis. He asks you to research this topic and write a nice and clear 3-4 page report summarizing your analysis and main Öndings. Your manager is a really nice person, so you donít want to let him down. You decided to do the growth accounting exercise using PWT 10.0 data for the years 1959, 1969, 1979, 1989, 1999, 2009, 2019. For both Australia and Canada you need to do the following tasks: 1.1 Download Excel data Öle from PWT 10.0 database.1 Focus on real GDP, 1Available at www.rug.nl/ggdc/productivity/pwt/ 1 real capital stock, employment and labour share data for both Australia and Canada. SpeciÖcally, use the following series:  Real GDP at constant 2017 national prices (in mil. 2017US$), rgdpna  Capital stock at constant 2017 national prices (in mil. 2017US$), rnna  Number of persons engaged (in millions), emp  Share of labour compensation in GDP at current national prices, labsh In your Önal report to the manager you will need to have a nice, properly labeled table similar to Table 7.2 in Chapter 7 of your textbook, which reports the compiled data and the sources of data. Typically this kind of background information goes into an Appendix of your report. 1.2 For each country, calculate TFP using a Cobb-Douglas production function with the labour exponent set equal to the average labour share of this country, with the average taken over the selected years (1959, 1969, 1979, 1989, 1999, 2009, XXXXXXXXXXPlot calculated TFP levels for both countries on the same graph, while making sure that they both start from 100 in 1959. You will need to re-scale the entire TFP series for both countries in order to achieve that. 1.4 Calculate the average annual growth rates of output, capital, employment and TFP for each decade, and report them in a nice table just like Table 7.3 in chapter 7 of your textbook. 1.5 For each decade and for each country calculate the share of output growth that can be attributed to growth in capital, employment and TFP. 1.6 Write a brief but informative summary of main insights that your manager should learn from your research in preparation for his important presentation. This report with all the tables and charts (needed to support your conclusions) will be the Örst part of your homework. It will be graded on the basis of how good my TA feels about your report. It is certainly a subjective metric, but this is what you should expect from your future manager anyway. 2 2 Analyzing Income and Substitution e§ects (20 points) In a one period model of Chapter 4, suppose the real wage has decreased, but the non-wage income increases at the same time so that to exactly o§set the income e§ect of the real wage fall. Use carefully labeled charts to show the impact of these changes on the representative consumerís optimal choices. Use letters and intervals to clearly label various points and distances in your charts. Your charts must clearly show the following details: a) The income and substitution e§ects of the real wage change alone. b) The magnitude of the change in the representative householdís nonwage income which eliminates the income e§ect of the real wage change. c) The e§ect of both income changes combined on consumption. d) The e§ect of both income changes combined on leisure. e) The e§ect of both income changes combined on labour supply. 3 Plotting a chart with a trend curve (20 points) Figure 1.3 in your textbook shows log of real per capita income in Canada and an HP Öltered trend curve Öt to this series. You will need to plot a similar chart, but for natural logarithm of Canadian Real GDP (not per capita) PLUS a linear trend Öt to this series. In order to do that you need to Önd Real GDP data for Canada. This series should be quarterly frequency, seasonally adjusted at annual rates, and cover the period from the Örst quarter of 1961 to the third quarter of 2020. You can Önd these data on Statistics Canada website. This exercise is easiest to do in Excel, but if you want to do it in other software packages, I am Öne with that. Label and format the chart to make it look as professional as possible. My TA will be comparing your charts with my and giving you grades based on how close they are in terms of quality.

Himanshu · Accepted Answer

The Drivers of 1959-2019 output growth in Canada and Australia
•	Both Canada and Australia experienced an impressive rate of output growth between 1959 and 2019, averaging 3.10 and 3.37 percent respectively.
•	A growth accounting decomposition shows that physical capital accumulation was responsible for the bulk of the output growth accounting for 115 percent of the output growth in Canada and 94 percent of the output growth in Australia.
•   The contribution of employment growth has also been substantial at 60 percent in   Canada and 59 percent in Australia.
•	The growth of total factor productivity accounted for roughly a fifth of output growth, contributing 12 percent in Canada and 23 per cent in Australia.
•	Overall, TFP grew faster in Australia reaching 73 percent of its 1959 level in 2019, while in Canada the TFP in 2019 was 57 percent of its 1959 level.
•   TFP growth in Canada was more uneven over these years.
The enviable growth of per-capita income in the two port cities of Canada and Australia has attracted a substantial amount of interest in the drivers of their growth experience. The growth of output in these cities averaged 3.1 and 3.37 percent respectively between 1959 and 2019.
Growth decomposition - growth accounting:  procedure which decomposes a country’s growth rate of output and shows to what extent it can be attributed to the accumulation of factors of production (physical capital, human capital) and to what extent – to the technological progress  A technique which allows us to derive the growth rate of productivity (technological progress – directly unobservable!) The Solow residual is the portion of an economy’s output growth that cannot be attributed to the accumulation of capital and labor, the factors of production. It is a measure of productivity growth that is usually referred to as total factor productivity (TFP)
Total factor productivity is affected by a huge variety of technological, economic, and cultural factors. Innovation, investment in more productive sectors, and economic policies aimed at liberalization and competition all boost TFP. Total factor productivity is a measure of economic efficiency and accounts for part of the differences in cross-country per-capita income. The rate of TFP growth is calculated by subtracting growth rates of labor and capital inputs from the growth rate of output.  Applying a simple growth accounting decomposition to due to Solow (1957) (MarkHuggett, 2020) we find that capital accumulation played the dominant role in both cities accounting for 115 percent of output growth in Canada and 94 percent of output growth in Australia. Table 1 shows the annual growth rates of real output, real capital stock, employment and TFP in both cities broken down into Six decades. In order to compute the TFP series we posited a Cobb-Douglas production function Y=zKaN1-a, where Y stands for output, z for TFP level, N for employment and a is the parameter, which we calibrated using the average labour share. More specifically for each city, we set (1-a) equal to its average  share  of  labour  compensation  in  GDP  at  current  national prices,   where   the   average   was   taken   over   1959,   1969,   1979,   1989,   1999, 2009, 2019 observations.
Table 1: Annual growth rates of output, capital, employment and TFP
Canada
	Decades
	Output
	Capital 
	Employment
	TFP
	1959-1969
	5.098006
	4.819557
	2.06623101
	1.655112
	1969-1979
	4.032079
	4.23655
	2.880032286
	0.5136343
	1979-1989
	2.83612
	3.563796
	2.09243652
	0.008004
	1989-1999
	2.356006
	2.582894
	0.99559719
	0.566761
	1999-2009
	2.066649
	2.937054
	1.50593928
	-0.15485
	2009-2019
	2.215308
	2.552042
	1.29313513
	0.292719
	Average
	3.100695
	3.48649
	1.792277
	0.480232
Australia
	Decades
	Output
	Capital 
	Employment
	TFP
	1959-1969
	5.083281
	4.807673
	2.71951681
	1.679686
	1969-1979
	3.00472
	3.502087
	1.49128129
	0.508036
	1979-1989
	3.382625
	3.121403
	2.3661265
	0.63886
	1989-1999
	3.315074
	2.36366
	1.17759886
	1.544445
	1999-2009
	3.044764
	2.955316
	2.25857898
	0.437816
	2009-2019
	2.353843
	2.576094
	1.71328767
	0.209152
	Average
	3.364051
	3.101039
	1.95439835
	0.836333
The last row of Table 1 containing the simple averages of growth rates in each column, shows that the output growth was on average faster in Australia than in Canada by Marginal percentage points.  The average growth of employment was also faster in Australia, but the Capital stock growth was slight low in Australia in comparison with Canada. It is well known from the growth literature that the TFP growth is the main driver of the long- run growth in income per capita. Figure 1 shows that on average TFP growth was faster and less uneven in Australia than in Canada. In particular Canada TFP grew much faster between 1979 and 1989, but then decelerated sharply and even reversed between 1999 and 2009.
   Figure 1. Source: PWT 10.

1 Growth accounting exercise (20 points total) Imagine that your top manager is about to give an important presentation to a group of OECD executives about the growth experience of two countries,...

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