Question

Consider the following data for a hypothetical economy. All payments to labor are two third of total GDP. From 1960 to 2019, the capital-output ratio has remained constant at 3. All values are continuously compounded, annualized growth rates, in percent. Growth in Capital per worker (1960–2019): 2 Growth in Total Output (1960-2019): 6 Discuss whether this economy is on a Balanced Growth Path. Compute your best estimate for the growth rate of the labor force. Describe one policy that can increase the standards of living of workers in this economy. Make sure that you carefully explain the policy and how it impact the standards of livings.

Answer 1

An equilibrium in which major aggregate economic variables, such as output and the capital stock, grow at the same and real interest is rate is constant. This reflects historic observations of the long term stability of interest rates and capital-Output ratios in developed countries. In the above mentioned hypothetical economy, the capital-Output ratio has remained constant at 3, all values are continuously compounded and annualized growth rates.Thus, this shows that economy is on a Balanced Growth Path. The balance growth path refers to simultaneous and coordinated expansion of several sectors of an economy

3.A standard of living refers to the amount and quality of material goods and services available to a given population. Here, in this economy we can see that payments to labour is 2/3 of the total GDP, which is very good. It means the employment rate is very good. We need to focus on improving the public health.

Improve Public Health: Related to health care is the issuess of obesity and the growing diseases of affluence. Obesity and poor public health are a key factor in reducing standards of living. Rather than spending money on treatment of disease, (which the current model promotes) there needs to be greater focus on improving health and preventing related health problems by:

• Taxing sugary or fatty foods.
• Regulation of the food industry to reduce portion size etc.
• Ending the subsidies of corn starch which has encouraged growth of high sugar food, like tax subsidies to junk industry.
• Encouraging cycling and pedestrians in cities centers -giving less priority to motor cars.