ECON2102
Macroeconomics 2
Tutorial 1
Economic Growth
You are a senior analyst who is providing advice to the Government and provide explana-tions about behaviors of capital 丑ow. Based on the models you have learned, you believe that Human Capital (H) is an important component that needs to be explicitly included and accounted for in growth models. You suspect that H is an important factor explain- ing why the marginal product of capital difers among countries. You are proposing the following model specification:
(1)
To successfully explain diferent MPK’s across countries accounting by human capital, you are interested in the following aspects:
1. Find the expression for the marginal productivity of capital (MPK) for two cases: θ = 0.7 and θ = 0.3
2. Explain the relationship between the MPK and human capital (increasing or de- creasing function)
3. Use the model to explain why capital may flow from poor to rich countries
4. Is return to education higher or lower in countries with scarce capital?
5. Discuss the level of L in Australia in the context of all the countries over the world. Is Australia labor abundant or scarce, comparing with other countries? Can you directly compare employment levels across countries? You may find the relevant data from ABS website or other data sources, if necessary.
Economic Growt: War and Economic Recovery
Imperial forces have decided to attack Alderaan. The attack destroyed most of the capital owned by the Rebel Alliance, the Secretary of the Cabinet, Senator Bail Organa, has requested your advice in order to restore the Galactic Republic.
1. Use the Solow-Swan Model to explain the Cabinet the efects of the destruction of capital on output, consumption, real wages, and real rental rates. (Hint: Assume the standard cobb-Douglas production function discussed in class).
2. Using the Solow-Swan Diagram explain to the Cabinet why the Rebel Alliance is expected to grow faster after the destruction of capital.
3. Give one economic explanation for why growth could be even faster after the de- struction of capital than the basic model predicts. Use the basic model or extend the basic model to justify your explanation.
4. The Cabinet has asked you to provide information about a saving rate that may maximize rebels consumption. Is there an optimal saving/investment rate(s) in the Solow-Swan model?