Problem Set #7

Due Tuesday, October 26 before class

(please write your section and TA’s name on your solutions)

Economics 116a, Fall 1999

Professors Nordhaus and Hall

Remember: Silence is silver, but brevity is golden.

1. Compare and Contrast. Explain the distinction between the two terms in one sentence.

(a) Capital deepening vs. net investment.

(b) PPF vs. aggregate production function.

(c) Labor productivity vs. total factor productivity.

2. “Arguments without data are never more than eloquent – arguments with good data can often be persuasive.” To help you become economically persuasive, the following gives you some practice at understanding and using economic data.

(a) Locate the major economic data “Macroeconomic Indicators 116" on the class web page.

(b) Calculate:

1. The growth rate of real and nominal GDP for 1997 and 1998.

2. The average growth rate for real GDP for 1960-70 and for 1970-80.*

*[Hint: To calculate average growth rates, use the following formula:

where t1 is starting year, t2 is ending year, g is the average annual growth rate, and yrs is the number of years between t1 and t2.]

3. From your reading, explain the slowdown in real GDP growth between the two decades.

3. Growth Accounting. Use the “fundamental growth-accounting equation” (equation (1) on page 224 of the textbook).

(a) What is the growth rate of output if labor grows at 1 % per year, capital grows at 4 % per year, and technological change is 1.5 % per year? What is the growth rate of labor productivity?

(b) What happens to your answers in part (a) if labor growth slows to 0 % per year?

(c) What happens in part (a) if labor and capital have equal shares in GDP?

(d) Explain how an economy can have a positive output growth rate while output per capita is declining? Why might a society care more about per capita output growth than absolute growth?

4. Thus Spake Cassandra. A pessimist might argue that 1973 marked the end of the Industrial Revolution. She might point to the productivity slowdown and be skeptical of the "new economy."

To pursue this issue, recall the “seven trends” of economic growth in the textbook. Assume that all the features of the earlier era were still present today except that technological change and innovation were to cease.

(a) For each of the seven trends, state whether the trend will continue or not with no T.C., and explain your claim in a sentence.

(b) Explain what will happen to the growth in per capita output in this scenario.

(Keep it short. Points will be deducted for long, rambling answers.)