ECON-2220 Chapter Notes - Chapter 3: Linear Technology, Capital Accumulation, Autarky

89 views2 pages

rubywoodchuck938

15 May 2018

School

Vanderbilt University

Department

Economics

Course

ECON-2220

Professor

De Andrade

For unlimited access to Textbook Notes, a Class+ subscription is required.

Study Guide 3: Classical Growth Models

1. Explain at least two criticisms of the Rostow’s stages growth model.

● In reality, you don’t know who is actually going to spend the savings required for

take off. This could lead to corruption.

● Traditional society is not essential for development

● Sometimes, development continues after take off (not exactly linear, stages overlap)

2. Assume a closed economy, perfectly elastic labor supply, and linear technology.

Suppose the incremental capital-output ratio (ICOR) is 3 and the gross savings rate is

10%. Use the Harrod-Domar growth equation to determine the rate of economic growth.

What would the gross savings rate have to be to achieve 5% econ growth? How much is

the saving gap? Explain how according to this model, this country could reach out the 5%

econ growth target.

Net savings S=sY where S=savings, y=saving rate, and Y=output

Net investment (I)=change in capital stock

I=ΔK

ΔK/ΔY=c or ΔK=cΔY where 1/c measures efficiency of capital accumulation

S=sY=cΔY=ΔK

Or simply sY=cΔY

ΔY/Y=s/c: rate of GNI is determined by saving rate and efficiency of capital accumulation

In this example, c=3 and s=10%

Rate of economic growth=s/c=10%/3=(10/3)%

.05=s/3

s=.15=15%

Savings gap is 5%.

The country could start saving more in order to reach the 5% growth target.

3. Explain the main contribution of the Lewis growth model. Graphically explain how the

allocation of factors of production should be re-allocated between the two sectors to

promote a structural change in the economy. Explain in detail three of its key

assumptions. Explain how would the Lewis theory’s conclusions differ if these

assumptions do not hold?

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Explain at least two criticisms of the rostow"s stages growth model. In reality, you don"t know who is actually going to spend the savings required for (cid:522)take off. (cid:523) this could lead to corruption. Traditional society is not essential for development. Sometimes, development continues after take off (not exactly linear, stages overlap: assume a closed economy, perfectly elastic labor supply, and linear technology. Suppose the incremental capital-output ratio (icor) is 3 and the gross savings rate is. Use the harrod-domar growth equation to determine the rate of economic growth. Explain how according to this model, this country could reach out the 5% econ growth target. Net savings s=sy where s=savings, y=saving rate, and y=output. K/ y=c or k=c y where 1/c measures efficiency of capital accumulation. Y/y=s/c: rate of gni is determined by saving rate and efficiency of capital accumulation.

Related Questions

4. Consider a farmer who can either plant or market/consume his crop. Whatever amount he plants becomes a crop twice the size the following year. For example, if he plants seed from 2 ears of corn, he gets 4 ears of corn at harvest. Assume he starts off with 50 bushels of corn.

a. If he decides every year to market/consume half his crop and plant the rest, what will his harvest be next year? What will his consumption be? How fast will his production and consumption grow over time?

b. If he decides every year to market/consume 2/5 of his crop and plant the rest, what will his harvest be next year? What will his consumption be? How fast will his production and consumption grow over time?

c. Compare the consumption of the farmer in each of the first five years under plans a. and b.

d. Why might the results of plan b. not be realistic?

5. Imagine the following goal of Lenin/Stalin at the beginning of the Soviet regime in Russia: to overtake (i.e. equal) and surpass the worldâs industrialized economies in terms of GDP per capita. To achieve this goal, the main instrument of control is the fraction of national production that is devoted to building the nationâs productive capacity: new machines, factories, transportation equipment, and roads. That is, the main instrument to achieve this goal is what fraction of GDP to devote to investment. The rest of national production is used for consumption, i.e. to produce consumer items like clothing and food. The country begins with relatively little capital, being mostly rural and non-industrialized. Assume each of the following: ï· GDP per capita starts in USSR at $300/year. ï· The worldâs industrialized economies start with GDP per capita of $5000/year. ï· Population growth rates are 2% everywhere in the world. ï· All capital depreciates at 8% per year.

a. At what average annual rate will income per capita in the USSR have to grow in order to overtake (i.e. to equal) the industrialized nationsâ income per capita in exactly 30 years? Assume the industrialized nationsâ income per capita is growing at 2% per year.

b. If the USSR sustains the growth rate of part a., how long after it has overtaken the industrialized nationsâ GDP per capita will it take for it to attain double the industrialized nationsâ GDP per capita? Again, assume the industrialized nationsâ GDP per capita is growing at 2% per year. For parts c.-e., assume the basic growth framework of Harrod-Domar, and that 1 rubleâs worth of capital always produces 0.5 rubleâs worth of output (i.e. A=0.5). Also, assume inputs are used more efficiently in the industrialized countries, so that A=0.6 there.

c. What fraction of national output must the USSR devote to building new capital goods in order to attain the growth rate of part a.? What fraction would be left for consumer items? [Hint: another word for the fraction of output devoted to building new capital goods is the investment rate, i.e. the ratio It/Yt. And, remember that savings equals investment, so the investment rate equals the savings rate.]

d. At what rate are the industrialized countries saving if they are growing at 2% per year? e. What would you calculate the ratio of consumption per capita in the USSR to consumption per capita in the industrialized countries when the USSR overtakes the industrialized countries (i.e. when GDP per capita is equal)? Assume the savings rates of parts c. & d. What would the ratio be when the USSR reaches double the industrialized nationsâ GDP per capita?

ECON-2220 Chapter Notes - Chapter 3: Linear Technology, Capital Accumulation, Autarky

Document Summary

Get access

Related Documents

ECON 2220- Midterm Exam Guide - Comprehensive Notes for the exam ( 29 pages long!)

ECON 2220- Final Exam Guide - Comprehensive Notes for the exam ( 29 pages long!)

ECON-2220 Lecture Notes - Lecture 1: Capital Accumulation, Commodity Market, Production Function

Related Questions