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Handout3 PDF
Handout3 PDF
EXERCISE
Question 1 (Backing out the total factor productivity)
Suppose we observe in the data that output per capita in Country A and B are $10,000 and $500, respectively.
The capital stock per person of Country A and B are $20,000 and $2,500, respectively. Assume that capital
income share is 1/3. What can be said about the productivity of both countries?
b) Numerical example
Now suppose that d = 10%, s = 25%, A = 10 and L = 8, what is the capital accumulation equation expressed
in both Kt and kt ?
c) Steady-state level of capital and output (Please excuse the number, it’s ugly! So don’t worry
about it.)
Solve for the steady-state level of capital, K ⇤ , in terms of parameters outlined in a), then apply the numbers
from part b). Solve for the steady-state level of output, Y ⇤ , in terms of parameters.
d) Consumption
In light of what we have established in part a), write out the equation for consumption Ct .
Country with Effect towards K ⇤ Effect towards Y ⇤ Effect towards k ⇤ Effect towards y ⇤
Higher s
Higher d
Higher A
Higher L
Higher a