Answer to Question #222908 in Macroeconomics for king

Question

a) Consider an economy in which the labour force grows by 2.7 percent per annum, physical capital grows by 4 percent per annum and human capital grows by 1.8 percent per annum. Suppose 45 percent of national income goes to labour and 40 percent to capital. Use a constant returns to scale production function to answer the following growth accounting questions:

i. If the Solow residual were zero what rate of growth would the economy achieve?

ii. The country’s actual rate of growth has been 4.5 percent per annum, which is faster than the growth rate generated by the accumulation of capital and labour stocks. Calculate the value of the residual.

Answer 1

i)

Y(t)=K(t)+L(t)+A(t)

where:

• Y(t) represents the total production in an economy (the GDP) in some year, t.
• K(t) is capital in the productive economy – which might be measured through the combined value of all companies in a capitalist economy.
• L(t) is labour; this is simply the number of people in work, and since growth models are long run models they tend to ignore cyclical unemployment effects, assuming instead that the labour force is a constant fraction of an expanding population.
• A(t) represents multifactor productivity (often generalized as "technology")

=(0.04*0.4)+(0.27*0.45)+0.18

=0.3175

=31.75%

ii)

31.75%-4.5%

=27.25%