Question

Answer All Parts Of The Following Question

A. ) Why, in the absence of technological change, will a county’s steady state growth rate equal its population growth rate?

B.) Show graphically and explain how a decrease in an economy’s depreciation rate will affect both output per worker in that economy and the economy’s long-run growth rate.

Answer 1

A )In the absence of technological change, will a county’s steady state growth rate equal its population growth rate...The Malthusian model of population and economic growth has two key components. First, there is a positive effect of the standard of living on the growth rate of population, resulting either from a purely biological effect of consumption on birth and death rates, or a behavioral response on the part of potential parents to their economic circumstances. Second, because of the existence of some fixed resource such as land, there is a negative feedback from the size of population to the standard of living. These two components generate a number of predictions. Specifically, in the absence of technological change or expansion in the stock of the fixed resource, population will be stable around a constant level. Second, without changes in the function generating population growth, technological improvements or increases in the stock of resources will eventually result in more people but not a higher standard of living.

As a description of population-income interactions, the Malthusian model had a long period of success, covering most of human history in most of the world until the beginning of the industrial revolution. In this paper we ask whether the model has any relevance to the world today.

For the first part of the model—the positive causality running from income to population growth—the answer is clearly no. For reasons that have not fully been determined, countries that get richer now see falling rather than rising rates of population growth. Regarding the second part of the model—whether higher population lowers the standard of living—some further clarification is required before we can even pursue this issue.

First, it important to differentiate among the different channels through which population affects economic outcomes. We will characterize as non-Malthusian those channels that work through the growth rate or demographic structure of the population. These include the effect of population growth in diluting capital per worker; the effect of the population age structure (itself a function of fertility) on the ratio of working age adults to dependents; the association of lower fertility with higher human capital investment via a quality-quantity mechanism; and the effect of lower fertility in freeing up female labor for output production. We reserve the term Malthusian for channels having to do with the size of the population, such as the congestion of fixed resources. This channel was the one Malthus thought about, and it is also the only one that pins down the level of population in steady state, which matches historical experience. Thus, in our typology, it is perfectly possible for reductions in population growth to raise income per capita even though the Malthusian channel is irrelevant.

A second issue to be clarified is at what geographic scale we are looking. It is possible that in a world with trade, a high level of population in a single country will not lower that country’s income relative to others, but that a world with more people will be worse off because of congestion of productive resources or the environment. We do not pursue that possibility here. Instead, we ask whether there are countries or subnational regions in the world where the local version of Malthusianism hold true.

The likeliest place to look for Malthusian effects is among poor countries, for several reasons. First, poor countries have had (and are continuing to have) the largest increases in population. The population of Africa is expected to multiply by a factor of 9.8 between 1950 and 2050. In India, during the century of most rapid population growth (1920–2020) population is expected to multiply by a factor of 5.5. By contrast, in Europe over the period 1800–1900 (roughly the century of fastest population growth), population increased by a factor of 2.2. If the initial population in these regions represented some equilibrium in the relation between population and resources (given available technology), the more rapid population growth is more likely to result in a disequilibrium in this relationship. Second, poor countries are least able to use trade as a means of avoiding resource constraints. Finally, as discussed further below, poor countries empirically have much higher shares of natural resource rents in national income than do rich countries.

The idea that poor countries might suffer negative economic effects from overpopulation has a long pedigree. However, in recent decades, the Malthusian perspective has fallen out of favor among development economists, who have stressed the substitutability of technology, capital, and labor for fixed factors, as well as the productive benefits of density per se or of the technological and institutional changes induced by population pressure (see Allen C. Kelley 2001). We take as an operative test of the Malthusian channel the answer to the question: if a country had fewer people but was otherwise unchanged in terms institutions, human and physical capital per capita, productivity, terms of trade, etc., would it be significantly better off in per capita terms

We model growth and technology transfer in a world where technologies are specific to particular combinations of inputs. Unlike the usual specification, our model does not imply that an improvement in one technique for producing a given good improves all other techniques for producing that good. Technology improvements diffuse slowly across countries, although knowledge spreads instantaneously and there are no technology adoption costs. However, even with "Ak" production, our model implies conditional convergence. This model, with appropriate technology and technology diffusion, has more realistic predictions for convergence and growth than either the standard neoclassical model or simple endogenous-growth models.

• The stock of capital per worker: All else equal an economy with more physical capital can produce more than an economy with less physical capital. Because savings and investment add to the stock of capital, more investment in capital leads to more economic growth.
• The amount and quality of labor: As long as the capital per worker does not decrease, more labor leads to more production. For example, 4 people that each have a waffle maker make fewer waffles than 10 people that each have a waffle maker. Also, improvements in human capital, such as education and health, improve the productivity of that labor.
• The level of technology
  • the know how to combine labor, capital, and natural resources to produce is an important aspect of production. Improvements in technology increase productivity.

B) A decrease in an economy’s depreciation rate will affect both output per worker in that economy and the economy’s long-run growth rate

• Investing in infrastructure: infrastructure, like highways or bridges, are physical capital that is available to everyone. By investing in infrastructure, governments add to the capital stock of a country. But infrastructure depreciates, just like any other capital. That means governments must replace depreciated infrastructure to maintain it.
• Policies that affect productivity and labor force participation
  • Encouraging a higher labor force participation rate, such as tax incentives on labor for participation, can lead to more economic growth.
• Policies that encourage capital accumulation and technological change
  • Policies that encourage savings, and therefore investment in capital, lead to higher economic growth. Similarly, policies that encourage technological change, such as tax credits for research and development, also lead to more economic growth.

The production possibilities curve illustrates the maximum combination of output of two goods that an economy can produce, such as capital goods and consumption goods. If that curve shifts out, the capacity to produce has increased.

Recall that the long-run aggregate supply curve (LRAS) is vertical at the full employment rate of output. That means that if the full employment output increases (in other words, moves to the right along the horizontal axis), then the LRAS curve shifts to the right: