Question

(12) With respect to the macro-economic production function, what is the difference between the overall level of technology (A), and the type of technology known as worker Efficiency, or worker effectiveness? (Worker efficiency is called the “g” in the Solow Model.) That is, how would you distinguish overall change in technology in the macro-economy from the technical change embodied in a rise in worker effectiveness? If worker effectiveness gives rise to sustained increases in the economy’s standard of living, even in the Steady State, can the overall level of technology impact the result as well?

(13) Given your answer to (12) above, how would you describe your own increase in worker effectiveness with respect to any endeavor you are working on today in Davis? (LIKE DOING THIS HOMEWORK, FOR EXAMPLE?) What about after you graduate? How does the overall level of Technology (The Big “A”) link to the increase in your own worker effectiveness?

(14) Using the Solow Growth Model, assume that the depreciation of the capital stock (gamma), and “n” (growth of the labor force) are all greater than zero. The growth rate of worker efficiency, “g”, is zero. What are the alternatives to changing the rate of saving in order to reach a “higher” K/L ratio and a higher Y/L ratio at the STEADY STATE equilibrium (k* and y*)? How would you go about promoting these changes?

(15) What is “The Golden Rule”? Why is the term “Golden Rule” applied to the Golden Rule Steady State of y* and k*? (Note: the answer is not “that level of Y/L and K/L that maximizes consumption per worker, C/L!)

(16) You are the boss of an economy that has worker efficiency rising at a 1 percent annual rate. The labor force is growing by 4 percent annually. The depreciation rate of your capital stock per worker is 10 percent. Also your economy is operating at a savings rate whose associated capital/labor ratio steady state is ABOVE the GOLDEN RULE steady state. Your challenge is to get to the golden rule steady state. What do you propose to do and how might you go about it? What happens to consumption per worker as you go from where you begin to the Golden Rule steady state? What happens to the MPK as you approach the Golden Rule Steady State? What value of MPK are you aiming for? Hint: think of MPK as the "return on capital" in this instance.

Answer 1

Overall technological change indicates increase in production capacity and thus shift in production function Y = F( K, L)

Y = A F(K, L) = Hicks neutral or constant K/ L

Technological progress in growth model is exogenous and it allows the output, capital, population to grow at a constant rate to follow a balanced growth path. Due to technological change, the production level, quality of goods and services grow in the long run.

Technological progress can be of three types such as labor augmenting technological change, capital augmenting and Hicks neutral technological change.

Y = F(K, AL) is the labour augmenting or Harrod neutral technological change.

Labor augmenting technological progress enhances worker effectiveness per unit of capital. With the effective labor, a new steady state can be achieved with constant output – worker hour ratio for each unit of output. Per capita output grows at the rate ‘g’ in the steady state.

Changes in the efficiency of the labour cannot shift the production function entirely, but can rotate the production function towards labour intensive sector.