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# The solutions to these questions were developed by Jorge Rojas.

I hope it can be
useful for our discussions. Best wishes. Jorge

Solution.

Part 1.
We have that Y  K  ( AL)  R 1   , where   0 ,   0 and     1 . We also know
that K  sY  K , g ( A)  g , g ( L)  n and R  0  g ( R)  0 .

K
The presence of land in the production function means that no longer converges to
AL
some value as it happens with the standard Solow Model. Therefore, instead of analysing
K
the quantity , a useful analysis is to see whether there is a balanced growth path (BGP),
AL
and , if so, what the growth rates of the economy’s variables are on that path.

As A , L and R are each growing at a constant rate, what is needed for a BGP is that K
and Y each grow at a constant rate. Let us prove it.

1
K  sY  K /
K
K Y
  s    (1)
K K

 g (K ) is constant if Y / K is constant.

We have that:
Y  K  ( AL)  R 1   / ln()
 ln(Y )   ln( K )   ln( AL)  (1     ) ln( R)
d
 ln(Y )   ln( K )   ln( A)  ln( L )  (1     ) ln( R) / ()
dt
Y K  A L  R
           (1     ) 
Y K  A L R
A L
but we know that: g ( A)   g , g ( L)   n and R  0 . Therefore, we get the
A L
following equation:

Y K
       g  n (2)
Y K

Defining the function g ( X ) as the growth rate of the variable X . We can rewrite equation
(1) as follows:

g (Y )    g ( K )    g  n (3)

We know that the growth rate of Y and K must be equal if the economy is on the BGP.

 g bgp (Y )  g bgp ( K ) (4)
Inserting equation (4) into equation (3) we get:

g bgp (Y )    g bgp (Y )    ( n  g )

Rearranging the terms for g bgp (Y ) we obtain:
 (n  g )
 g bgp (Y )  (5)
(1   )

Equation (5) is the growth rate of Y on the BGP.

 (n  g )
Now, assuming that  0 which is reasonable because n, g should be positive in
(1   )
most cases, and  ,   0,1 .

From equation (3) if g (K ) exceeds its BGP value, g (Y ) does as well, but by less than
Y Y
g (K ) . This implies that the ratio is falling. From equation (1) we can see that if is
K K
falling, then g (K ) is falling. In other words, if g (K ) exceeds its BGP value, g (K ) will
fall.
Now, if g (K ) is less than its BGP value, g (Y ) does as well, but by less than g (K ) , in
Y Y
other words, is increasing. If is increasing, from equation (1) we can see that g (K )
K K
is increasing. Hence, if g (K ) is less than its BGP value, g (K ) is increasing.

Thus g (K ) converges to its BGP value, and so the economy converges to its BGP.
Part 2.
The intuition tells us that a sustained growth in output per capita is possible while
technological progress can beat the problems generated because of the limited land. We
have seen this over the past few centuries. We saw technological progress defeating
Malthus’ ideas.
Now, mathematically we can see the following at the BGP for the output per capita.
 g bgp (Y / L)  g bgp (Y )  g ( L)
 (n  g )
 g bgp (Y / L)  n
(1   )
 (n  g )  (1   )n
 g bgp (Y / L) 
(1   )
g  (1     )n
 g bgp (Y / L)  (6)
(1   )

We can see that output per capita can grow constantly if technological progress is larger
than the drag generated by land; in this case, the drag is given by the term (1     )n
where (1     ) is the elasticity associated with the land term.

If g  (1     )n , it is possible to have a sustained growth in output per capita. This
development confirms our intuition.

Solution.

Part 1.
We have that Y  K  ( AhL)1 . Let us rewrite this equation in terms of output per worker.
Y  K  ( AhL)1
 Y  K  ( Ah)1 L1
L
 Y  K  ( Ah)1 
L
Y K
  (Ah) 1
L L
Let us define y  Y / L and k  K / L
1
 y  k  (Ah)1 /() 1
1 1

 y 1  {k  ( Ah)1 }1
1 
1 1
y k Ah
 
1
1 1
y k Ah
 
1 1
 y y k Ah

1
k
y 
Ah
1
y

(1 )
k 
 y    Ah
 y

We want to get the equation for the Solow residual, A. Then,

(1 )
k
 A  y    h 1
 y

 k  ( 1) 1
 A  y    h
 y
Or equivalently,

1 
 A y (1 )
k ( 1)
 h 1 (7)

Part 2.
We know that h  e u . Then, we can write equation (7) as follows:

1 
 A y (1  )
k ( 1)
 e  u (8)

  1/ 3
  0.10
u : the fraction of an individual’s time spent learning skills in years.
Table I: Data and calculations for the Multifactor Productivity index.
Years Y K Y/L K/Y u h L K/L A g(A)
1950 1686,6 4992,9 14 3,0 8,6 2,4 120,5 41,4 3,4 -
1951 1815,1 5191,8 15 2,9 8,9 2,4 121,0 42,9 3,6 5,8%
1952 1887,3 5389,8 16 2,9 9,2 2,5 118,0 45,7 3,8 3,6%
1953 1973,9 5615 16 2,8 9,2 2,5 123,4 45,5 3,8 0,2%
1954 1960,5 5824,4 17 3,0 9,2 2,5 115,3 50,5 3,9 4,0%
1955 2099,5 6074,2 17 2,9 9,2 2,5 123,5 49,2 4,0 1,3%
1956 2141,1 6301,7 17 2,9 9,3 2,5 125,9 50,0 3,9 -1,8%
1957 2183,9 6515,5 18 3,0 9,3 2,5 121,3 53,7 4,1 5,2%
1958 2162,8 6694,7 18 3,1 9,4 2,6 120,2 55,7 4,0 -2,8%
1959 2319 6933,2 18 3,0 9,5 2,6 128,8 53,8 4,0 0,7%
1960 2376,7 7158,7 19 3,0 9,5 2,6 125,1 57,2 4,2 5,2%
1961 2432 7380,2 19 3,0 9,7 2,6 128,0 57,7 4,1 -2,3%
1962 2578,9 7641,3 20 3,0 9,9 2,7 128,9 59,3 4,3 4,4%
1963 2690,4 7926,6 20 2,9 9,9 2,7 134,5 58,9 4,3 0,3%
1964 2846,5 8249 21 2,9 10 2,7 135,5 60,9 4,5 4,8%
1965 3028,5 8616 22 2,8 10,1 2,7 137,7 62,6 4,8 4,7%
1966 3227,5 9004,5 23 2,8 10,2 2,8 140,3 64,2 5,0 4,5%
1967 3308,3 9364,1 23 2,8 10,3 2,8 143,8 65,1 4,9 -1,7%
1968 3466,1 9750,1 24 2,8 10,4 2,8 144,4 67,5 5,1 3,6%
1969 3571,4 10131,1 24 2,8 10,4 2,8 148,8 68,1 5,0 -0,4%
1970 3578 10451,3 25 2,9 10,5 2,9 143,1 73,0 5,1 1,6%
1971 3697,7 10797,2 25 2,9 10,6 2,9 147,9 73,0 5,1 -1,0%
1972 3898,4 11225 26 2,9 10,8 2,9 149,9 74,9 5,2 2,7%
1973 4123,4 11668,1 26 2,8 10,9 3,0 158,6 73,6 5,2 -0,1%
1974 4099 12014,8 26 2,9 11 3,0 157,7 76,2 5,1 -2,7%
1975 4084,4 12283,2 26 3,0 11,1 3,0 157,1 78,2 4,9 -2,3%
1976 4311,7 12607,4 27 2,9 11,2 3,1 159,7 78,9 5,2 4,3%
1977 4511,8 13002,6 27 2,9 11,3 3,1 167,1 77,8 5,1 -0,3%
1978 4760,6 13459,2 28 2,8 11,4 3,1 170,0 79,2 5,3 3,7%
1979 4912,1 13916,7 28 2,8 11,5 3,2 175,4 79,3 5,3 -1,1%
1980 4900,9 14269,2 28 2,9 11,6 3,2 175,0 81,5 5,1 -2,3%
1981 5021 14609,5 28 2,9 11,6 3,2 179,3 81,5 5,1 0,0%
1982 4919,3 14866,5 28 3,0 11,7 3,2 175,7 84,6 5,0 -2,9%
1983 5132,3 15195,5 29 3,0 11,8 3,3 177,0 85,9 5,2 3,6%
1984 5505,2 15662,9 30 2,8 11,9 3,3 183,5 85,4 5,4 4,5%
1985 5717,1 16178 31 2,8 12 3,3 184,4 87,7 5,6 2,6%
1986 5912,4 16702,7 31 2,8 12 3,3 190,7 87,6 5,6 0,1%
1987 6113,3 17200,7 31 2,8 12,1 3,4 197,2 87,2 5,5 -0,8%
1988 6368,4 17691,5 32 2,8 12,1 3,4 199,0 88,9 5,7 3,9%
1989 6591,8 18160,3 32 2,8 12,2 3,4 206,0 88,2 5,7 -0,6%
1990 6707,9 18586,4 33 2,8 12,3 3,4 203,3 91,4 5,8 1,8%
1991 6676,4 18883,1 33 2,8 12,3 3,4 202,3 93,3 5,7 -1,0%
1992 6880 19212,4 34 2,8 12,5 3,5 202,4 94,9 5,8 1,6%
1993 7062,6 19609,5 34 2,8 12,5 3,5 207,7 94,4 5,8 0,3%

This data is sourced from Jones C. (2002), "Sources of US Economic Growth in a World of Average
Ideas", American Economic Review Vol. 92, No. 1. g(A) 1,3%
Multifactor productivity index, A.

7,0

A = 0,051*time - 95,617
2
R = 0,9233
6,0

5,0
Multifactor productivity index

4,0

3,0

2,0

1,0

0,0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
Time [years]

Figure 1: Level of Multifactor Productivity index.

Growth rate of the Multifactor of Productivity index

10%
g(A) = -0,0005*time + 0,9268
2
R = 0,0476
8%

6%

4%

2%
Growth rate of A

0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

-2%

-4%

-6%

-8%

-10%
Time [years]

Figure 2: Growth rate of Multifactor Productivity index.
Income per capita

100
Ln(Y/L)

10

1
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
Time [years]

Figure 3: Logarithm of Income per capita
From figure 2, we may see that there is a slowdown in multifactor productivity growth. In
1951 the growth rate of A was 5.8%, and at the end of period of time in analysis, in 1993
was 0.3%. However, there are jumps of the growth rate of A from positive values to the
negative ones, and vice versa. To make a decision whether there was a slowdown for this
span of time, it was applied a linear regression between g (A) and time. The equation in
figure 2 is the regression model, and it shows that, in fact, there is a slowdown in the
growth rate of multifactor productivity because the coefficient for time is negative.
Moreover, we can see that this slowdown in productivity has impacted on income per
person for this period. This is shown in figure 3.