Q1) a)

139 years

b) Using the equation 3.9, if we have a true growth rate of 3%. Then the level of per capita income in 1800 would be $87.15. This would not be plausible as in 1870 we have figures of $2,840. When we compare this information and the difference of 70 years the amount does not seem right. Q2) a) The production function I propose for to model output per capita for these countries is the Cobb-Douglas production function with labour share parameter = 2/3.This function implies that capitals share of aggregate income will be 1/3 of total income in equilibrium. Therefore it is consistent with the assumptions described in the question.

Y = K1/3 L 2/3
b) Calculations are based on y= k1/3. Figures rounded to 3 decimal places. Country USA Australia China Japan Korea Singapore Per capita GDP (y) 1 0.708 0.034 0.933 0.336 0.698 k1/3 1 0.966 0.309 1.041 0.657 0.960 Implied TFP () 1 0.733 0.110 0.896 0.511 0.728

No country has a higher TFP than United States.

c)

Measuring TFP with Per Capita GDP

1.2 1 Implied TFP 0.8 0.6 0.4 0.2 0 0 0.2 0.4 0.6 0.8 1 1.2 Per capita GDP (ratio scale, US=1) US AUS CHN JPN KOR SGP

There is a high correlation between TFP and Per capita GDP. Developed countries with a rich economy are more inclined to have high levels of TFP, while poor countries usually have low levels. That is to say a countrys TFP is will correspond to its Per capita GDP, ie. Australia has Per capita GDP of 0.708 and a TFP of 0.733.

d)

Capital-output ratio vs. Investment rate

4 3.5 Capital-output ratio 3 2.5 2 1.5 1 0.5 0 0.00 0.10 0.20 0.30 0.40 0.50 Investment rate, (out of 1) USA AUS CHN JPN KOR SGP

From the graph the relationship between the Capital-output ration and the investment rate is weak. But when one includes more countries into the graph the relationship is more obvious, for example Fig. 5.3 in Macroeconomics Charles I. Jones. The countries included in this graph are either in steady state or on transition paths. If we take Singapore and Australia as examples; the two countries have approximately the same capital output ratio hovering around 3.44. What we notice is the difference in the investment rate Australia has 23% while Singapore is at 39%. From this we can assume Singapore is at a steady state. In order to accurately determine whether a country is in steady state or on transition paths we need figures for depreciation. This is because in the steady state, investment equals depreciation.

e) When we observe the TFP levels of Singapore and Korea, which are 0.511and 0.728 respectively, we see that the two countries do not utilise capital as efficiently or productively as the US. Singapores output production is only half of the US in terms of efficiency and Korea is at 72%. From the data given we can see that both Singapore and Korea have a very high investment rate: Singapore at 39% and Korea at 36%. When we compare this with the United States 18%, we realise that investment of capital accumulation is the driving force behind the high growth rates in Singapore and Korea. Knowledge acquisition would be more for a country in a higher steady state. f) Because transition dynamics due to an increased investment rate was responsible for the high growth in Korea and Singapore before 1994, rather than a higher steady-state due to knowledge acquisition, the prediction for subsequent growth in the two countries would be decrease as they approach a steady state. For Singapore the subsequent growth decreased dramatically to a approximately -5% change in 1998. Similarly, Korea also experienced a sharp decrease in 1998 of around -6%. After 1998, the growth of both countries started to increase. g) Japans economics experience in the 1990s and beyond supports Krugmans prediction of the Great Japanese growth slowdown. In 1992, Krugman points out that Japans per capita income was still only 83% of the US, while its overall output was just 42% of the US. From the 1990s to 2000s the highest Japanese growth ever reached was approximately 2.5%, which is a measly amount compared to 10% or higher achieved in the 1960s during its transition dynamics phase. h) Chinas increased investment rates would have impacted positively on Chinas growth rate over the past 20 years as a result of transition dynamics. The past 20 years saw the rapid increase in Chinas economic growth, as a result of capital accumulation and economic reform. Krugman mentions that If China can continue to grow at 10% annually by the year 2010 its economy will be third larger than ours. In the past 20 years China has managed to achieve an average growth rate of roughly 10%, however its economy has not surpassed the US yet.

If we assume that China has undergone much of its transition dynamics, one could predict that the Solow model for future growth in China would decrease due to its higher investment rate. Because as it leaves the transition dynamics it enters the steady state where higher investment cannot achieve a level of growth it did before. i) Krugman in his 1994 paper, The Myth of Asias Miracle argues that the economic growth of countries like Korea and Singapore are the result of transition dynamics, and the further growth will decrease. He demonstrates this through the use of statistics which can be directly related back to economic models. When we compare TFP and per capita GDP, we find that there is a close relationship between the two. For Singapore this is very true as its per capita GDP, when compared to the US is 0.698 and its TFP is at 0.728, as you can see the two figures are very close. Investment rates are another subject that supports Krugmans arguments of transition dynamics. Both Singapore and Korea have a very high investment rate, 39% and 36% respectively. This high investment rate coupled with the transition dynamics allowed the two countries to achieve soaring growth circa 1994. The key economics principle that Krugman emphasizes in predicting slower future growth rates due to the past growth being the result of perspiration rather than inspiration is diminishing returns. The perspiration rather than inspiration notion is that working harder not smarter was behind the growth experienced. Krugmans prediction have ring true in that the growths of countries like Japan, Singapore and Korea have slowed down as they left their transition dynamics. However the reason behind this cannot be wholly attributed to diminishing returns, as many economic and political events have happened since Krugman wrote his paper. These events, such as the GFC have no doubt impacted heavily on the economies of many countries. Q3) Hand written