Question

Average Annual Growth Rates

Years	Y	K	N	z
1950-1960	3.6	3.7	1.1	1.7
1960-1970	4.3	3.9	1.8	1.8
1970-1980	3.2	3.0	2.4	.6
1980-1990	3.3	2.6	1.8	1.3
1990-2000	3.5	2.4	1.4	1.7
2000-2009	1.4	2.1	.2	.7
2010-2014	2.1	.9	.9	1.1

a) Relate K to z. Discuss how they should be related theoretically and how they appear to be related empirically (numbers in the table).

b) Relate K to Y. Discuss how they should be related theoretically and how they appear to be related empirically (numbers in the table).

Answer 1

(1) Relate K to z

In neoclassical economic theory, Physical capital is denoted as K and Land/natural resources/real state is denoted as z

So, here we will try to analyze the relationship between physical capital and natural resources theoretically as well as empirically with help of given data.

First, theoretical relationship, economist provide different criteria for physical capital but here we will consider man-made structures to be included in physical capital and natural resources include land upon which building and factories are built, minerals etc.

Now consider a country that is relatively abundant in Iron and steel (a component of natural resources). This country can use these natural resources for physical capital building. Therefore, a country that is relatively abundant in natural resources, if used efficiently, can enhance their physical capital base.

So, theoretically   should be positive

Second, empirical relationship,

From the 50s to 60s - is positive

From the 60s to 70s - is positive

From the 70s to 80s - is negative

From the 80s to 90s - is negative

From the 1990s to 2000s(2000-2009) - is positive

From the 2000s to period of 2009-2014 - is negative

(2) Relate K to Y,

Y is referred to as GDP

Here, we have to establish a relationship between GDP and Physical capital.

According to neoclassical theory, an increase in physical capital enhances production level through two channels. one, it is an input to the production process and when more input more production. Second, the increased physical capital provides impetus to the marginal productivity of labour. Therefore an increase in per capita output.

Hence as a whole, the increase in physical capital stimulates production process

So, theoretically    should be positive.

Now, empirical relationship,

From the 50s to 60s - is positive

From the 60s to 70s - is positive

From the 70s to 80s - is negative

From the 80s to 90s - is negative

From the 1990s to 2000s(2000-2009) - is positive

From the 2000s to period of 2009-2014 - is negative