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ECON204 MACROECONOMIC ANALYSIS
SESSION 2, 2018
WEEK 9
TUTORIAL GUIDE
Homework assessment
- Identify one economic factor that affected the trend growth of GDP (e.g. natural disaster
or change in technology) in your country (selected for the group assignment) in recent
years. Think about the effects of the economic factor using the Solow Swan model
presented in the lecture.
Question XXXXXXXXXXComputing long run equili
ium and the golden rule
Suppose that the production function is given by:
?? = 100 ??0.5??0.5
and the evolution of capital stock given by:
??+1 = (1 − ?)?? + ??
and in equili
ium
?? = ?? = ???
a. Derive the steady state levels of capital per worker k* = (Kt/Nt)* in terms of the
saving rate (s) and the depreciation rate ( ). Explain why and how s and affect k*.
. Derive the equation for steady-state output per worker (y*) and steady-state
consumption per worker (c*) in terms of s and . Explain why and how s and affect
y* and c*.
c. Suppose that = 5% (=0.05) and s = 5% (=0.05). Calculate k*, y* and c*. Calculate
saving per worker (s*=S*/N=sY*/N=sy*))
d. Show these solutions for k*, y*, c* and s* on the Solow-Swan diagram.
e. Using ? = 0.04, what is the saving rate that maximizes consumption per worker?
What is the golden rule level of capital per worker, output per worker and
consumption per worker? Why is this a useful concept?
f. What would happen to your answers in part e. if N doubled? Explain why you get
this answer.
Question 2
For each of the following economic changes, assess the likely impact on the growth rate and
the level of output per worker over the short-run and over the long-run.
a. An increase in foreign direct investment.
b. Stepping into aging society that induces people to save more and spend less.