LSE Economics Department

EC210 Macroeconomic Principles 2014/2015

Michaelmas Term

Kevin Sheedy
32L.1.09, x5022
k.d.sheedy@lse.ac.uk

Problem Set 6: Endogenous Growth Models

1. Human capital model : Reinterpret the human capital growth model as follows.
Suppose that there are two groups of people in a country, the lowly skilled and
the highly skilled. The lowly skilled have less human capital per person initially
than the highly skilled. Each type of worker produces output independently from
the other, using efficiency units of labour and total factor productivity, z, which is
assumed to be common across groups. Each individual in this economy accumulates
human capital on their own, and each has one unit of time to split between human
capital accumulation and work. Assume that the highly skilled have initially higher
efficiency of learning: bh > bl , and that uh 6= ul .
(a) In all developed countries, there has been an increase in the gap between the
wages of high- and low-skilled workers that has occurred over the last 30 years
or so. Determine how this model can explain this observation.
(b) If you were to design a policy that closes the wage gap, what would you suggest? Discuss some other aspects outside of this model that would need to be
considered.

2. Model comparison: Long-run economic growth is exogenous in the Solow growth

model but endogenous in the R&D model. Explain the key reason for this argument
by comparing the difference between physical capital and ideas.
3. Research & development model : Suppose that Apple Inc. decides to transfer all
its research and development centres to Belgium, which drastically increases the
fraction of Belgians employed in R&D (A rises). After a while it realises that it
was not a good idea and moves the centres back to the original countries.
(a) Show graphically how the time paths of output per worker and productivity
will compare under this scenario with what would have happened if Apple did
not pursue this strategy. If there are any changes in output after Apples arrival
and departure, be precise about their relative magnitudes.
(b) Assume now that Apple found the strategy successful and decides to stay
in Belgium forever. Show graphically how the growth rates of Belgium and
its neighbour the Netherlands will behave over time. Assume that initially
A,B > A,N and that the Netherlands are only a copying country.