Computational Tools Project

Effects of altering Beta and Theta parameters.

By: Thilini Perera 824566

 Introduction: The purpose of the following project is to observe the changing nature of the Ramsey Growth Model parameters and report the results. I will be taking into account two of the parameters used in this model; Beta and Theta. The Model: The Ramsey Growth Model is widely used as a tool to root out the perfect trade-off between the consumption and Investment. This dilemma arises because of the following statement: More Consumption in a time period means more utility in that time period but less investment and therefore less capital stock and less production in future time periods leading to less consumption hence less Utility and so on. The various functions that will follow try and encompass the following statement into mathematical form. The prevalent functions that will be seen in the excel file used to optimize our values are: 1. The Capital Accumulation Constraint 2. The Criterion Function The Utility in period t as a function of consumption in that period The sum of the discounted Utilities 3. The initial and terminal condition The terminal level of capital that is required to be equal or higher than the lower bound K* of capital to be left for the future. The values that this experiment will be accessing are the parameters that are used in the model. The aim of my conclusion will be to find and interpret the results in an economical context. The parameters that I will be reporting are: Beta: the discount factor starting at 0.98 Theta: The production function parameter (technological parameter) starting at 0.30 The initial level of capital that is introduced At the beginning of the experiment (7000 in this experiment)

 Results: With the initial parameter inputs the variable values are the following:

Beta: The following results will show the effects of the change in the Beta values.
Consumption Time 0 0.3 0.35 0.44 0.54 0.61 1 0.31 0.35 0.41 0.48 0.52 2 0.33 0.35 0.39 0.43 0.44 3 0.34 0.36 0.37 0.38 0.38 4 0.36 0.36 0.35 0.34 0.32 5 0.38 0.36 0.34 0.30 0.28 6 0.40 0.37 0.32 0.27 0.23 7 0.41 0.37 0.30 0.24 0.20 8 0.43 0.37 0.28 0.21 0.17 Beta 1 0.98 0.95 0.92 0.90

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 1 2 3 4 5 6 7 8

 Theta: The following results display the effects of a Theta change leaving the Beta constant
Consumption Time 0 0.35 0.51 0.64 0.77 0.88 1 0.35 0.52 0.67 0.82 0.95 2 0.35 0.53 0.70 0.86 1.02 3 0.36 0.55 0.73 0.91 1.09 4 0.36 0.56 0.76 0.96 1.17 5 0.36 0.57 0.79 1.01 1.24 6 0.37 0.59 0.82 1.07 1.32 7 0.37 0.60 0.85 1.12 1.41 8 0.37 0.61 0.88 1.17 1.50 Theta 0.3 0.4 0.5 0.6 0.7

1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Serie1 Serie2 Serie3 Serie4 Serie5 Serie6

Conclusion: After isolating theta and Beta respectively and altering the other to find the consumption values when the parameters are increased/decreased leaving everything else constant I have found the following. The standard Beta value, 0.98 displays an almost horizontal line. I found the values when beta is 1, 0.98, 0.95, 0.92, 0.90 and starting from Beta= 1 to Beta=0.90 the curve starts at a positive inclination and switches to a negative one leaving the standard Beta (0.98) as the above mentioned horizontal line. In the model the value of Beta serves the purpose of the discount factor As the discount rate increases (the discount factor decreases) making the value of Utility in the present more desirable. When we try to increase the Utility levels of the present we are bound to raise the consumption levels of the present to make it possible. The social discount rate

According to the graph the meeting point of all of the curves divide the present time from the future time, and as the left side of the curves show as Beta is decreased the line moves upwards. And the future consumption as a result goes down as shown on the right side of the curves. The theta is the technological parameter in the production function. An increase in the Theta value would mean that the production function would get a substantial boost. And example would be if better and faster machinery were introduced to a factory. This would increase the production levels and as a result the Yt or the income at time t would increase. This further raises the consumption levels at a constant rate throughout the alterations.