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Home Assignment 1.

Due Date: October 17.

Part I. (30 points)

Problem 1. (Challenges for Economic Development)

Go to the World Bank’s Website (http://www.worldbank.org/) and find and read the most recent World

Development Report. Describe the current challenges for global growth.

Problem 2. (Stages of Economic Growth)

Describe the stages of economic growth according to Costa, Kehoe et al, (The Stages of Economic Growth Revisited,

parts 1 and 2, Federal Reserve Bank of Minneapolis, Economic Policy Papers 16-5, March and April 2016). (Papers

available on Blackboard, also: https://www.minneapolisfed.org/research/economic-policy-papers/)

Part II. (40 points)

Problem 3. (The Solow Model – Cobb-Douglas Production Function)

Assume that the production function is given by: 𝑌 = 𝐴𝐾 0.4, where y is output per capita and k is capital per capita

(capital-labor ratio). Suppose that A=1, s=0.4 and δ=0.1.

(a) Using a computer spreadsheet, construct a series of values (a grid) for the capital stock (as on the horizontal axis

of the Solow diagram). (b) Calculate the corresponding series for output, saving (gross investment), and capital

depreciation and plot the series against the capital stock. (c) What is the long-run capital stock? What is the long-

run output? (d) Calculate and plot the growth rate of capital (ΔK/K) and output (ΔY/Y) as a functions of the capital

stock. [(e) Bonus. Suppose the current capital stock is K(0)=0.5. Calculate and plot the time series of capital stock

K(1), K(2), K(3), … and output Y(1), Y(2), Y(3), … ]

Problem 4. (The Solow Model – AK production function)

Assume that the production function is given by: 𝑌 = 𝐴𝐾, where y is output per capita and k is capital per capita

(capital-labor ratio). Suppose that A=1, s=0.4 and δ=0.1.

(a) Using a computer spreadsheet, construct a series of values (a grid) for the capital stock (as on the horizontal axis

of the Solow diagram). (b) Calculate the corresponding series for output, saving (gross investment), and capital

depreciation and plot the series against the capital stock. (c) What is the long-run capital stock? What is the long-

run output? (d) Calculate and plot the growth rate of capital (ΔK/K) and output (ΔY/Y) as a functions of the capital

stock. [(e) Bonus. Suppose the current capital stock is K(0)=0.5. Calculate and plot the time series of capital stock

K(1), K(2), K(3), … and output Y(1), Y(2), Y(3), … ]

Part III. (30 points)

Problem 5. (Human Capital)

Go to: http://research.stlouisfed.org/fred2 and download the data on the US population and total employment in

educational and health services over the last decade (2000-2010). To do so, click on “Employment & Population”,

select the categories “Population” for population data (“POP”) and “Establishment Survey Data” for educational and

health services data (“USEHS”). Once you have downloaded the data into a spreadsheet,

(a) Calculate the average growth rate of US population and total employment in educational services in the last

decade (2000-2010). (Hint: use the formula for the implicit growth rate from the lecture notes).

(b) Everything else being constant, what could you infer about the average quality of US workers?

(c) Would this have any implication on the perspectives for future growth in the United States?

Problem 6. (Technological Progress by Sector)

The concept of Total Factor Productivity (TFP) in economic statistics corresponds to what we have called A in our

lectures. Go to the website: http://www.bls.gov/mfp/mprdload.htm#Multifactor Productivity Tables (of the Bureau

of Labor Statistics). Under the heading: “1987–2014 Manufacturing Multifactor Productivity”, find and download the

Excel file “Manufacturing Sector and NIPA–level Manufacturing Industries KLEMS Multifactor Productivity Tables by

Industry”.

(a) Choose any 5 industries for the period 1987-2014 and plot the corresponding series of TFP.

(b) Calculate the average growth rate. (Hint: use the formula for the implied growth rate from the lecture notes).

Which industry has shown the greatest “technological improvement” over the period? Which one has shown the

least?

Problem 7. (Institutions and Economic Development)

a. Go to http://www.heritage.org/index/ranking and find three countries in each of the freedom categories (“free”,

“mostly free”, and so on). Click on the country name on the table for each country you select and read about the

rationale for their ranking. Provide a summary for the nations you selected.

b. Now go to http://www.heritage.org/index/explore?view=by-variables Note the per capita GDP of the three

countries you selected in each category, and calculate the average of the three you selected in each category. What

pattern do you notice? What preliminary conclusions can you draw concerning the relationship between freedom

and economic development?