Eco 435 Growth and Development

 

Growth Accounting Assignment

In this assignment you will do an exercise of growth accounting and to study

the impact of investment rate on long-run growth. In the attached excel

file, I provide the data on real GDP, real capital stock, total employment,

average level of human capital and real investment rate in China for the

period 1991-2011.

Some Guidlines:

• In all you calculations, assume that the labor income share is 0.5.

• Always express growth rate as annual average growth rate, and calcu￾late growth rate of a variable x(t) as ln[x(t+1)]-ln[x(t)]

• You need to submit a summary report and the excel spreadsheet that

you used for generating the results.

• The report should be no more than three pages, one-sided, double

space.

I. Do a conventional growth accounting by decomposing China’s real GDP

growth between 1991 and 2011 into the contributions from capital accu￾mulation, employment growth, increase in average human capital level and

TFP growth. According to this decomposition, which is the main source of

China’s GDP growth during this period?

II. As we discussed in the class, the capital accumulation is endogenous and

depends on the growth of the other three variables. Do a theory-based

growth accounting that decompose the GDP growth into the growth in

capital-output ratio, growth in employment, growth in average human cap￾ital level and growth in TFP. According to this alternative decomposition,

which is the main source of China’s growth? Explain why the conclusion

from this decomposition is different from the standard decomposition in I.

1

III. As I provided in the excel file, Since 1991, China’s real investment

rate has increased steadily from an initial rate of 15%. Many people have

argued that this increase in the investment rate is a main driving force of

China’s growth during this period. To see if this is true, do the following

counterfactual simulation using the Solow model: Assume that the total

employment, average level of human capital and the TFP remain the same

as in the data for the entire period, and that the initial capital stock and the

real GDP in 1991 are also the same as in the data. However, assume that

the investment rate is kept at 15% for the entire period so that the capital

stock and GDP in the years after 1991 are determined recursively by the

following two equations:

Kt+1 = (1 1 δ)Kt + 0.15Yt Yt+1 = At+1K0.6 t+1 (ht+1Lt+1)0.4

where δ = 0.07 is the depreciation rate and t = 1991, ..., 2010. How much

will the capital stock growth rate be reduced as a result of lower investment

rates? What about the GDP growth rate? Based on your calculation,

what do you think is the contribution to growth of the increases in the real

investment rate?

III. Now redo the counterfactual by assuming the investment rates are the

same as in the data, but the TFP level stays at the 1991 lelve, i.e., no TFP

growth. So the capital stock and GDP in the years after 1991 are determined

recursively by the following two equations:

Kt+1 = (1 1 δ)Kt + StYt Yt+1 = A1991K0.6 t+1 (ht+1Lt+1)0.4

where δ = 0.07 is the depreciation rate, St the investment rate in year t, and

t = 1991, ..., 2010. How much will the capital stock growth rate be reduced

as a result of no TFP growth? What about the GDP growth rate? Based on

your calculation, what do you think is the contribution of the TFP growth

to GDP growth?