Question

1. 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.
   1. Examine what impact this has upon the equilibrium level of capital per worker and equilibrium level of output per worker.
   2. If an economist examined this economy and undertook a growth accounting exercise, qualitatively, what components would explain the increase in output?
   3. 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) In the standard S-S model, an uptick in the population growth rate increases the growth rate of total output but lowers the steady state level of per capita output.

With zero population growth, the total output could only grow on support of capital accumulation and technological advancements. The per capita output nevertheless increases with zero population growth, ceteris paribus.

However, the challenge remains to consume that increased output given the zero population growth as economies could not endlessly grow (aka “consume higher and higher”) as per the model.

b) In qualitative terms, growth implies increase in multi-factor productivity (MFP) or rise in per capita output mainly driven by technological advancements.

c) Paul Krugman and Alwyn Young concluded that the growth in East Asian economies was in quantitative terms (on the sole backing of increased capital pumping using the principle of “money begets money!”) and not in qualitative terms (increase in productivity, efficiency or effectiveness).