Question

Consider the standard Solow-Swan model that we discussed in lectures except assume that there is zero population growth rate. Suppose there is an increase in total factor productivity in this economy.

a. Examine what impact this has upon the equilibrium level of capital per worker and equilibrium level of output per worker.

b. If an economist examined this economy and undertook a growth accounting exercise, qualitatively, what components would explain the increase in output?

c. Relate this result to the findings of Paul Krugman and Alwyn Young. They find that output growth in East Asian economies is driven to a substantial extent by growth in capital.

Answer 1

a. The Solow-swan model is an economic model that explains the long run economic growth of a nation by considering the factors like capital accumulation, labour or population growth and increase in the productivity. It states that the long run economic growth is a result of the technological progress in the economy. The Total factor productivity of an economy is evaluated by dividing the total output by the total labour and the input cost with the labour share of 70% and the remaining by the input cost. Now considering the given situation where there is an increase in the total factor productivity in the economy, this would mean that the total output in the economy has increased with the same input cost. This means that the output per worker has improved which has caused an increase in the output of the economy. Thus, it can be concluded that the output per worker hs improved in such an economy. Now considering the capital per worker, there woukd be a right shift in the capital requirement for the worker as there is an increased productivity per worker. Hence the capital input per worker has also increased. But considering the share of the labour, it can be seen that the increase in the labour productivity is greater than the increase in the capital requirement per worker in such a case.

b. The qualitative analysis of n economy woukd refer to the analysis that is focused on the non computing data available in the economy. Thus, it takes in to consideration the non-computing factors like morale of the worker, satisfaction of labour, increased efficiency in the economy, increased supply which could meet the requirements of the economy etc while considering the increase in the output. Thus, while considering the above qualitative factors, we can see that on such an economy, the increase in the output is due to thw improvement in each of the above given factors.

c. The findings of Paul krugman and Alwyn young states that the magical growth of the East Asian economies is due to thw growth in the input capital. Now, considering the effects of the Solow model and the improvement in the total factor productivity caused by the increased labour contribution and the qualitative components, we can see that although the findings are true to a certain extend, it cannot be said as the solo reason behind the magical expansionary growth in the East Asian economies. The East Asian economies are abundant of labour potential which is a major factor that drives in the input cost of the economies. It can also be considered that the input potential of the economies were influenced by the trade factors in the international economy. Thus, it can be concluded that lthough the findings are true considering certain period of time of the East Asian economies, it cannot be regarded as a generalised statement that can be applied even today.