1. EC102: CLASS 2 LT Christina Ammon

2. Essay question In the lectures we have defined K as capital per worker and Y as GDP per worker. Let us now call E the efficiency with which capital is used (a high E might be due to more technical knowledge in the economy). Define y=Y/E and k=K/E. Call y “GDP per efficiency unit of labour” and k “capital per efficiency unit of labour.”

3. Essay Question a Suppose that E is constant (there is no population growth either). Show that there is a steady state where k is constant  First have to find the law of motion of capital  Without technological growth given by Δk=sfk-δk  Steady State is found when Δk=0  k* is: k*=sf(k*)/δ

4. Essay Question c In the steady state, is capital per worker K increasing, decreasing, or independent of E?  In steady state k is independent on E: k*=sf(k*)/δ  This is because we defined k such that it is independent of E!  But capital per worker is given by: K/L=k*E  => Capital per worker depends positively on E  But capital per effective worker depends negatively on E!  If E changes, e.g. doubles => k is halved as k=K/EL and nothing else changed  But, k* is unchanged => growth of k until we reach steady state

5. Essay Question d Now suppose that E grows at rate g. How does the law of motion for k change?  What is the new law of motion? Δk=sfk-(δ+g)k  Can just remember this, but need to understand this

6. Essay Question 1d Δk=sfk-(δ+g)k  Here k=K/EL – i.e. the capital per effective worker  In a way: defined in order for us to be able to solve model  In this model for the capital per effective worker it doesn’t matter whether workers become more productive or we have more workers i.e. E grows or L grows (It matters for capital per worker though! )  K/L however is increasing in g

7. Essay Question e Is there still a steady state where k is constant?  Yes, as we look at k=K/EL - specifically defined to take anything out that grows by itself  Also know that Δk=sf(k)-(δ+g)k  Find steady state as before – set Δk=0 k=sf(k)/(δ+g)

8. Essay Question f In the steady state, is the capital-labour ratio constant?

9. Question 1 Public policies designed to stimulate technological progress do not include:  A. tax breaks to encourage homeownership.  B. the temporary monopoly granted by the patent system.  C. tax breaks for research and development.  D. subsidies given by public funding bodies.

10. Question 2 Substantial government subsidies to research are justified if:  A. the private return to research is greater than the social return to research.  B. the private return to research is approximately equal to the social return to research.  C. the private return to research is less than the social return to research.  D. the private return to research is positive, but the social return to research is negative.

11. Question 3 In poor economies enforcing intellectual property rights  a) Will promote growth by encouraging new discoveries  b) Will hinder growth by slowing down the adoption of technologies developed elsewhere  c) Will promote growth by preventing “pirates” from stealing other firms’ ideas  d) Will promote growth by stimulating human-capital investments

12. Question 4 Corruption is detrimental to growth because it:  a) Reduces private investment  b) Reduces public investment in infrastructure  c) Makes the economy less efficient  d) All of the above

13. Question 5 If greater human capital leads to faster adoption of new technologies  a) The growth rate of output should be higher in countries with a higher growth rate of human capital  b) The growth rate of output should be higher in countries with a higher level of human capital  c) Richer countries should experience a higher rate of growth of human capital  d) Increases in human capital should be associated with increases in wages for workers with high human capital