b) Find out the per capita income and per capita consumption in the steady state, when τ=1/3.

Growth  theory  

Miguel Lebre de Freitas Exame Final (28 Jan 2013)

I (4.5 val)

Define 3 of the following concepts:

(i) Trading population for productivity (ii) Learning by doing

(iii) The Lucas (1990) Paradox (1990)

(iv) Proximate versus fundamental causes of economic growth (v) Horizontal Innovation

Grupo II (7,5 valores)

Consider na economy where the production function of an individual firm is given by: 𝑌_! = 𝐴𝐾_!^!/!𝑁_!^!/!. In this economy, the saving rate is equal to 18% and the depreciation rate is 2%. Population and technology are constant. There is also a tax on production (τ), which varies along the exercise. For the moment, assume that A=1.

a) Under perfect competition, what are the capital and labour income shares? Are these shares in accordance to the empirical evidence?

b) Find out the per capita income and per capita consumption in the steady state, when τ=1/3. Show the equilibrium in a graph and discuss its stability.

c) Examine the implications of a change in τ to τ=2/3, on the following variables: per capita income;

per capita consumption; interest rate. Describe the time paths of these variables following the shock.

d) Discuss the optimality of the saving rate in this economy.

Grupo III (5,5 valores)

Assume now that 𝐴 = 3𝐺 𝑌 ^{! !}, where G refers to public expenditures.

e) Compute the aggregate production function in this economy. Explain why this economy needs a government.

f) Find out an expression for A, in terms of τ and . Find out the equilibrium values of per capita consumption and of per capita income in terms of these parameters..

g) Describe the benevolent planner solution. Explain why public provision involves a trade off.

h) Describe the kleptocrat solution. Compute the corresponding level of public goods provision and compare with (g).

i) Compare the tow solutions in the locus (𝜏  ,c) and explain.

IV (2.5 val) Choose one:

1. “Competition improves the static efficiency but is bad for growth”.

2. “The advantage of backwardness implies that laggard countries are doomed to grow faster than rich countries”.