Question

Policy issues:
Evaluating the rate of saving

? Use the Golden Rule to determine whether the U.S. saving rate and capital stock are too high, too low, or about right.

?If (MPK ? ? ) > (n + g ),
U.S. is below the Golden Rule steady state and should increase s.

?If (MPK ? ? ) < (n + g ),
U.S. economy is above the Golden Rule steady state and should reduce s.

Policy issues:
Evaluating the rate of saving

To estimate (MPK ? ? ), use three facts about the U.S. economy:

k = 2.5 y
The capital stock is about 2.5 times one year’sGDP.

? k = 0.1 y
About 10% of GDP is used to replace depreciating capital.

MPK ? k = 0.3 y
Capital income is about 30% of GDP.

Policy issues:
Evaluating the rate of saving

k = 2.5 y

? k = 0.1 y

MPK ? k = 0.3 y

To determine ? , divide 2 by 1:

?k ? 0.1y k 2.5y

? ??0.1?0.04 2.5

Policy issues:
Evaluating the rate of saving

k = 2.5 y

? k = 0.1 y

MPK ? k = 0.3 y

To determine MPK, divide 3 by 1:

MPK?k ?0.3y k 2.5y

? MPK ? 0.3 ?0.12 2.5

Hence, MPK?? = 0.12 ?0.04 = 0.08

Policy issues:
Evaluating the rate of saving

? From the last slide: MPK ? ? = 0.08
? U.S. real GDP grows an average of 3% per year,

so n + g = 0.03? Thus,

MPK?? =0.08>0.03=n+g? Conclusion:

The U.S. is below the Golden Rule steady state: Increasing the U.S. saving rate would increase consumption per capita in the long run.

Policy issues:
How to increase the saving rate

? Reduce the government budget deficit (or increase the budget surplus).

? Increase incentives for private saving:
?reduce capital gains tax, corporate income tax,

estate tax as they discourage saving.

?replace federal income tax with a consumption tax.

?expand tax incentives for IRAs (individual retirement accounts) and other retirement savings accounts.

		NOW YOU TRY: Prove each of the following statements about the steady state of the Solow model with population growth and technological progress. The capital–output ratio is constant. Capital and labor each earn a constant share of aneconomy’s income. [ Hint: Recall the definition MPK = f( k + 1) - f( k).]

Applications: Green Growth

? Debate among economists, environmentalists, and others about the effects of economic growth on the environment.

? Pessimists point to the fact that increased production of goods and services may imply increased degradation of the natural environment, both because production uses scarce natural resources and because it generates pollutants as a by-product.

? Hence, they argue that economic growth should not be an aim of policymakers.

Applications: Green Growth II

? Optimists note that newer, more productive technologies often are less polluting and use fewer natural resources than older production methods.

? Moreover, richer countries may wish to invest more resources in cleaning up the environment. From this perspective, growth is good for the environment.

? The truth seems to be in the middle.

Applications: Green Growth III

? Next Figure reproduces the relationship between income and the environment for various indicators of environmental quality.

? For some aspects of the environment, rich certainly does seem to be better:

? Rich countries enjoy safe water and good sanitation while poor countries do not.

? But the environmental problems of municipal waste (which fills landfills) and carbon dioxide emissions (which may contribute to global warming) are relatively worse in richer countries.

Applications: Green Growth IV

? Perhaps most interestingly, measures of air quality indicate that air pollution is worst in middle-income countries. As countries grow, their air quality apparently worsens for a while but then improves when they become sufficiently rich.

Applications: Growth and Corruption I

? Paolo Mauro (1995) has investigated the link between growth and corruption.

? He combines assessments of the degree of corruption, and the integrity of the judicial system into a measure that he termsbureaucratic efficiency (BE).

? Countries such as the United States, Finland, Japan, New Zealand, and Singapore do well in terms of the BE index; countries like Egypt, Haiti, Indonesia, Nigeria, and Thailand do poorly.

Applications: Growth and Corruption II

? There is a clear positive association: Countries with high levels of corruption and bureaucracy tend to have lower income.

? It might be the case that high-income countries develop better institutions.

? But Mauro’s statistical analyses suggest that thelink does indeed run the other way: More corrupt countries tend to be poorer and also tend to grow more slowly.

Part I Evaluation of the saving rate using the Solow model.

For China collect the data that would help you to determine the following three empirical facts: (Hint: read lecture 16)
1.1. What is the relationship between country’s capital stock and GDP?
1.2. What fraction of a country’s GDP is used to replace depreciated capital?

Use the same fact as for the U.S. economy (Lecture 16)

1.3. What fraction of a country’s GDP is equal to country’s capital income?