SOLUTIONS TO CHAPTER 1 Problem : - {@) Since the growth rat ofa variable equals the tne derivative of ts log, a8 show by equation (10) in the text, we can write fy 20, dn219 _abfxioveo] Zo” at & Sic the log ofthe product oftwo variables equals the sum oftheir logs, we have 200 _dfinX(+in¥(O]_ din Xie) din Yoo Zw) orsimply zy _ xo Ze) x xo Yo (0) Aaa, since the growth ate of variable equal th time derivative os lg, we can write co) 208820) _alXOXO] Z0~ dt & Since the og ofthe rato of wo variables eas the difference in thi ops, we have 6) 20 eXO-BYEO] _ainxto _diee a &@ ~ & & * cor simply 20) _ xo Yo @ 20,30 _ Yo © 20)" x0 YO « (0) Weave cy 2 diaz, dix") Zo" ét at Using the et hat nf XE J ~ aX), we have 20_dawxo] ax”, X0 2) dt at X(t)” svhore we have sed he fc that is constant ooblem 1.2 (a) ing theinforatin provided in the question, the patho the growl rate of, X(0/X(0), scopic in | XCO| the figure at ight. x00 From time 0 to time t , the growth rate of X is constant and equal to a> 0. Attime tthe growth rate of X drops to 0. From time t; to time ts, the growth rte of | gf} X rises gradually from Oto a, Note that we have made ‘the assumption that X(t)/X(t) rises at a constant rate fom t, tots. Finally, aftr time ts, the growth rate of Xi constant and equal to a again2 Solutions to Chapter 1 (b) Netethat he slope of inX¢) plated gains time is ‘equal tothe grow rte of X(Q, Thats, we know diaxe) Xo & XC (See opuaton (1.10) inthe txt.) From time 0 totime tthe slope oflX¢) equals a> 0, The InX¢) lous hasan inflection point att ‘an the grows rate of X() changes discontinuously from ato 0, Baweent and tthe lope of Xi) rises gradually fom Ot. After time tthe slope of TeX() is constant and equal t a> O again, Problem 13 (@) The slope ofthe break-even investment ie is sive by (+ g8) and thus a fallin the rate of epreciaton, 8, decreases the slope of the breakeven investment ao. “The actual investment curve, sf is unaffected From the gure a right we can soe hat the balanced ‘romi-pats level of eapial per unit of cetive labor fer Grom k*t0 sew (8) Since the slope ofthe break-aven investent line is given by (2+ g'+ 8), arisen the rate of technological progress, g, makes te beak-ewen investment line steeper. “The actual investment curve, s(}), i unaffected, From the figure a ght wo can sc tha the balanced rowth-pat lve of capital per unit of effective labor falls fom kt Ks(©) The break-even investment in, (a + 8+ 8k, is unaffected by the rise in capital's share, “The effect ofa change in onthe actual investment carve, sk", can be determined by examining the derivative G(2Va. It is possible to show that oO S sk® ink For 0 0,ork> 1, 2k? /60> 0 and othe new actual investment curve lis above the ld one. For Ink <0 ork <1, dk /2a.<0 and so the new actual invest curve ies below the oi one. Atk that c= 0, the new actual investment curve intersects the od one In adtion, the effect ofa rise in a on k* is ambiguous and depends onthe relative magnitudes of s and Gat gt). leis possibleto show that a risoin capital's share, a, will cause k* to rise ifs > (n +g 8) ‘This is the case depicted inthe figure above (2 Suppose we modify the intensive form ofthe production function to include a non-negative Constant, B, so thatthe actual investment curve is given by SBA), B > 0. ‘Then workers exerting more effort, s that output per mit of effective labor is higher than before, can be sdeled as an increase in B. This increase in B ifs the actual investment curve up The break-even investment line, (a + g+ Sk, is unaffected. From te fgute at right we can see that he balanced growt-path level of capital per unt of effective labor ‘ss ftom K* to kts Problem 1.4 (@) Atsome time, call tte ther isa discrete upward jump inthe number of workers. This reduces the amount of capital per unit of effective labor ftom k* to kxew . We can se this by simply Tooking atthe 0, this fallin the amount of capital per unit of effective labor reduces the amount of output per unit of effective labor as well. Inthe figure below, y falls ftom y* to Ysew4 Solutions to Chapter 1 (©) Now at this lower kyrw , actual | investment investment per unit ofeffetvelabor_| ett ab ‘exceeds break-even investment per yo ft) anit of effective labor, Thats, ry sfQkaaw) > G+ Sw . The (e+ 3k ccmomy is now saving and investing more than enough to offct sew ‘depreciation and technological Drogress a this lower kaw. Thus k bogins rising back toward k*. As ‘capital pe unit of effective labor begins rising, so does output per uit SF ‘of effective labor, That is, y begne rising fiom Ju back toward y* ew (©) Capital per wit ofeftiv labor wil continue tors ntl evetally rust the orginal eve of 1, Atk, mvexmene por uit of effictiv labor i again just cough to offet tecnologia progress end depreciation and keep K costar. Sips krecus os orga value oF * onc the economy aga ems tor balanced growth path, output pe nt of efctive labor ls returns tos orignal vale of ya) eoblem 1 (a) The oquaton describing he evolution ofthe capital stock per nit ofeffeive labor i given by ( k= 2f()-Gore+dk Substituting in for the intensive frm f te Cobb-Douglas, 1) =", ils kask®—(o4g +k (n the balanced growth path iis zr avestment per unit fective labors qual to break-even investment por uit of fective labor and sok remain constant Denoting the balanced growth path value oFkas ke, webave sk" = (us g-r0K*, Rearanging wo solve fork yields @) ke=[sa+g+5]!™. “Togo the balanced-growth-pat ale of output per unit of fective labor, substints equation 2) ithe intensive fom of the production fcc, y =I ©) yt-[yler819"™ Consumption pr unit of ffi abr onthe balanced growth path is given by Substituting equation G) mt this expression yields © otc -a9fyarg +5] sy (0) By det, the goldon- ea of the cpal tock thet leve at which oot per nt of effcctive labor is maximized. To derive this level of k, take equation (2), which expresses the balanced- (gowtrpath lee, ac marige taste Gor e1 oe" Nov ebatiteoqation (ito equation): ~(a+g+k*"*fasgs5k"*/ase+6] Afr some sraigifonvard algerie mnipltin, this spies ieSolutions to Chapter 1 § © choke (arg roe Equation (6) can be caily interpreted. Consumption per unt of effective labor is equal to ourpt per unit of effective labor, k*, less actual investment per unt of effective labor, which on the balanced growth path is the same as break-even investment per unit of effective labor, (n-+g + 8)k* "Now use equation (6) to maximize c* wit respectto i, The first-order condition is given by de/ter nok" -(a+g+5)=0, [Note that equation (7) i just a specific form of f(k") = (n+ 8+), which isthe general condition that implicitly defines the golden-ale level of capital per uit of effective labor. Equation (7) has a graphical imtorprtation: it defines the level oF kat which the slope ofthe intensive form of the production fiction is ‘equa tothe slope ofthe break-even investment line, Solving euton 7 forthe golden ee of yes © Rog =levla+a+9] (©) Tosget tho saving rte that will yield tho golden-rule level , substitute equation (8) into (5) son min +g +BJafin+g +a], whieh simplifis to ©) sox =. ‘With a Cobb-Douglas production function, the saving rate required to reach the golden rule is equal tothe laticity of ourput with respect to capital capitals share in output (if capital earns its marginal product) coblem 1.6 (@) Since there ie no technological progress, we can cary ou the entire analysis in terms of capital and ‘output per worker rather than capital and output per unit of effective labor. With A constant, they betave the same, Thus we can define y= Y/L and k= KIL. ‘The fal inthe population growth rate makes the break-oven investment line attr. Inthe absence of technological progres, the per unit time change in k, capital per worker, is given by Keasf(k)~(+m)k. Since k was 0 before the decrease in n ~the economy was ona balanced growth path ~the decrease inn causes k to x become postive, At", actual investment por ‘worker, sk"), now exceeds break-even investment por workor, (haw + 9k", Thus k moves toa new higher balanced growah path level. See the figare at right ry (mw + ‘As k rst, y ~ output per worker ~ also rises. ‘Since a constant faction of output is saved, consumption per worker ~ rises as y rises. This is summarize inthe figures below.6 Solutions to Chapter 1 (&) By dein, output can be writen a5 Y= Ly, Thus the grovah rate of opt is ¥/¥ =L/L-+ ify. Onthe inital balanced growth path, 3/9 =0 — output per worker is constant ~ fo ¥/¥=L/L=a, On the final balanced growth path, V/y = 0 again ~ output per worker is constant agtin— and s0 Y/Y = L/t= In the end, ouput wil be growing ta permanent owe at, NEw . Tint bc di ote ed em eatin le clenn © ope bce war ct err tt Stem nprttetensr hand tepoine se @) tog Tax tome be Seglpeharlsyonw end inne yew o_o ete SHEE Se yu med pon oes ter te tine gop Aree SRST ae nat tcp pater bg ako mas See Niet etme go peter nora “The growth rt ofthe marginal produc of apa, + fete] _ 00k Fr fk) £0) As ries toward Kt ths growth rate is negative since £"(R)> 0, €" (4) <0 and K > 0, Thus, 2 the ‘Sonamy moves fora eto the marginal product of capitals. Tha is, tows a ats ess than on the balancod growth path where ts gro ate 0 Problem L10 (@) By detintion a balanced growth path ocurs when all he variables ofthe model are growing at Constant ates. Despite the differences baween this model andthe usual Solow mode, it tums out that we ‘an again show thatthe economy wil converge toa balanced wrowth path by examining the behavior of k= RIAL. “Taking the time derivative of bth sides ofthe dfisiton of k = K/AL gives us we(&} REAL)-KILA-AL] kK Eta] {i,4) “Nan ay? aL ALL AL SAL LA. ‘Subsitating the capital accumulation equatic, K =[9F(K, AL}/2K]K—BK, andthe constant growth rates ofthe labor force and technology, L/L= and AJA = ito equation (1) yields [ark atyex] K-8K oFK,AL Ce AL aK Substituting 0K ALK = 0) into equation 2) gives us k= £(kOk-Bk~(n-+)k oF simpy ©) k=[P)-(a+8+5)k. ase) k-8k-(048)k Capital per unto effective labor willbe constant when = 0, ie. when (f°) (n+ g + 8)] k= 0. This condition holds if k= O(a case we wil ignore) or") -(a-+ +8) 0, Thus the balanced-growth-path level ofthe capital stock per wit of effective labor is implicitly defined by fk) = (0+ g +8). Since capital per unit of effective labor, k = KIAL, is constant onthe balanced growth path, K must grow atthe Same rate 38 AL, which grows at rate +g” Sios the prodction function has constant etums to capital ‘nd effective later, which bath grow at rate n g on the balanced groweh pa, ouput must also grow atSolutions to Chaprer} 11 rato +g onthe balanced growh path. Thus we have found a balanced growth path where al the variables of the model grow at constant rates. ‘Tho nes sep isto show that the economy actually converges to this balanced growth path. Atk k*, £° (4) =(a+ +8). [Fk > kt, £08) < (a+ @ +8). This follow fom the assumption that £" (k) <0 which ‘means tht (fll as k rises, Thus iFk > kt, we have K <0 so that k will ll toward its balanced sroweh-path value. Ifk (0+ +8). Again, this follows from the assumption that f° (k) <0 which means that fk) rises as i falls. Thus if < k*, we have k>0 sothat k will rise toward ts balanced growth-path value. Thus, regardless ofthe initial value of (as long as it isnot zero), the ‘economy will converge toa balanced growth path atk, where all he variables in the model are growing at ‘constant rates (8) Tho golden-rle level ofk~ the level ofk that maximizes consumption per uni of effective labor ~ i efined implicitly by £'0¢) = (a 4g + 8). Graphically, this occurs when the slope ofthe production function equals the slope of the break-even investment line. Note tha this is exactly the level of kthat the ‘economy converges to inthis model where all capital income is saved and all abor income is consumed, In this model, we are saving capitals contibuton to output, which isthe marginal product ofeapal times the amount of capital. If dat contribution exceeds break-even investment, (n+ g + BD, then rises, Iti Jess than break-even investment, k falls. Thus k settles down tos point where savin, the marginal product cof capital times k, equals bresk-even investment, (a+ g+5)k, Thats the economy settles dawn to a point where f° (Qk = (a+ g + 5k or equivalently f'(k) = (a+ g-+8). Peobtem Lak (@) Theprodicion function with eaptal-augmenting technological progress is given by ACK) LO! Diving bth sides of equation (1) by ACY" -*L¢) yields “yo {awk Ff _uo J OTL LaLa [aE sad ping yo [acts AML ut J . sod aly vo {wT ROTH LOE ‘Now, defining @ = a/(1 - a), k(t) = K(QVA()"L{t) and y(t) = Y(tVACQ"L(D yields @ y= ky” Inert anal amie of, ak he tine info ids ft) = KAU *NRO|AOLO] “KONO AOL LOAG] [ac*Le]”12 Solitons to Chapter 1 iq —8O___KO. f,A@ Lo} rE AwPLOL’ Aw” Lo and then using KX) = KOOVACOMLE), ACO /A(O =H and L¢0/L(Q) 0 ye ©) K=KEO/AC* LO) n+ MKC “The evoltion ofthe ttl capital stock is given bythe usual @ KQ)=2¥0 -8KO. Sabstiuting equation (4) into (3) gives us ke =s¥(0/ A Lt) -3K(0/ ACO? LE — G+ MRC =s9(0)— GH +A FIKL. Finally, esing equation 2), yO) = Ki, weave ' eG = KIO" ~Gu+n+5}KC). Equation (3) is wry similar tothe basic equation ‘governing the dynamics ofthe Solow model with Jaber-augmenting technological progres. Here, however, we aremeacuring in units of A(*Li) rather than in unite of effective labor, ACL(), ‘Using the sme graphical technique as with the basie Solow model, wo can graph beth components of L (2). See the figure at right. ou-+n + 5) ‘When actual investment per unit of AGLED, sk(" excoed breakeven investment per unit of ACO*LE), given by + OKC), k wil ise | toward kt, When acual investment per unit of| a iq) « KACOLAD | A()°L0) fll short of break-even investment per unit of A(QPL(, k wil fall toward kt. Ignoring tho casein which the initial level of kis 20 the ‘economy will converge Co situation in which kis constant atk*. Since y=, y wil also be constant ‘shen the economy converges to Kt “Thetotal capital stock, K, can be writen as APL. Thus when kis constant, K wil be growing atthe constant rat of bu +n, Silly, eta ouput, ¥, canbe writen as APLy. ‘Thus wien y is constant, ‘output grows a the constant rate of rn as well Sine Land A grow at constant rates by assumption, ‘we have founda balanced growth path where al the variables of the made grow at constant rates, (©) The production function snow given by OYO=HOL"™ Define Jt) = (VAC). The production faction can then be writen as © YH=[A@IE)]" LEO Proceed as in pat). Divide toh sides of equation (1) by AOL) and simply to obtain yo f__iw © 50" L0 Law U0)” "Now, defining = o/( -<, jt) = (ALA) and yd) = YONAQLED yields ©) 10 jo"Solutions to Chapter! 13, In order to analyze the dynes of), tke the ine derivative of both sides of jt)» Tey /A(O"L: Fo[acot eo] -Te[saco* AOL + Lea’) ‘ [acre . J@ Jo _[, aw Ley] ROrL® A@*LOL” Aw "Le! and then using J@) = T0/AQ'LED, ACW /ACO =H and L(O/L(t)=n yields 00) jo=Fo/a@*Lo-quemio. ie, ‘The next step is to get an expression for J(t). Take the time derivative of both sides of J(t) = J(t)/A(t): Ag? A® AW A® Now use J(t)=J(t)/A(0), Act)/A(t)=1 and J(®) = sA()Y(®) - 8)(t) to obtain 1-80, = AD Fe=s¥O-HH TO Substite equation (11) into equation (10): JQ) = 8¥(0/A PLE) ~ (+ BO /A(O LO ~ Gu+ MIO = sy) — [045-4 w+ GIO, Finally, sing equation ©), 30) J(O", we have (2) j= 510% -[n+5+ ud +H]0 ‘singh same apical technique sn the base Solow model we cn graph beth components) Sot gure gt. Inorg he — poss tht tial val of] ero te economy wl ener 98 (neo pt0) Simation were isco at | Since y= 3°, yillalo be constant win. | shot the eno converge fo J* | “The level of total output, ¥, ean be writin as AYLy. Thus when y is ‘constant, output grows a the constant rate of ut By definition, J=A*Lj, Once the ‘economy converges to the situation where J isconstant, J grows atthe constant rate of Gu +n. Since J= J A, the effective capital stock, J, grows at rate gu + n+ worn + y(l +). Thus the economy does converge to a balanced growth path where al the variables of the model are growing at constant rates. io Ten/aemtuey4 Solutions to Chapter (6 Ont atncad growth path, () = 0s om ation (12 ssrusplj =F Paxfass+na4, [fln+5+uctegy] Substitute equation (13) into equation (9) to get an expression for output per unit of A()*LA) onthe balanced growth path 4) yt=[y(n+5 + 10+9))] “Taketh derivative oy ith eps rt a] Slices. avdenid) | tn oder totum thin an elastic, mtipy bth sides by sng the expression for y* om equation (0) on th ghar sie e242 leatca) lial er Sinplifing ils ea [is pestemteatf aye lina s lavdeultea) i seh fly ay Eat ! wy ie (6) A first-order Taylor approviation of around the balanced ronth-ath val of y= wil be of the orm 9 yse/,_,[y-y"] "ie i tic ote Saba sation (12) to eatin (7 year asdend 0). +Seu(t44)) . Equation (18) expresses interme of j. We can express Jim tarms of: since y~ J*, we can writ Jy", Ths 29 evaluated a y= is given by af fal jal ly ean a2 Harssu0 ft] Now, yo is simply j'°* since y= 7" and thus a Myaye 20.- DROID _ MDa 454 (14g) =a(2~DI™" ofa +5+u0+9)Solutions to Chapter 11S [a5 + nO +9) and thos Substncing equation (19) int equation (16) gives the first-order Taylor expansion: 20) ys-C~a)[n+5+40+4) [y-y4] Solving this differential equation a inthe tex) yes QD y)-y* se talastent ty by@-y"4} “This means thatthe economy moves faction (1 ayfa +8 + (1 +4) ofthe remaining distance toward y* cach year (©) The slaty of ouput with respect to s isthe same in ths model as in the basic Solow model. The speed of convergence is faster in this model. In the basic Solow model, the rate of convergence is given by ((.a[a-+3 +) which is less than the rare of convergence inthis model, (I - ain +8+ pl +] since all ~ ‘Asin bo model th text, YK mst be constant in order for the growth rat of Kobe constant. That i, ‘be powth ates of Vand K must be equal “Taking logs of bath sides of the production function, Yit)= K(O" RDP TEOT[ACLEO] =F, vss @) YC) = oink () + HARE + YE) + C1 -a.-B ~7llaA@) + LE) ilfereniting beth sides of 2) with respect totime gives usSolutions to Chapter 1 © sy)=aa¢ (0+ Pea +er(t)=(-a-B- Yaa +8.) Substituting in the facts thatthe growth ates of RT and Late all equal tom andthe growth ate of A is equal tog ves us By ()=age (t)+Ba+m+(-c-P-r(0+8) Simplifying gives ws ip BVO = HBR +B+n+-adn~(Bry)ne (-e-P—E gx (t) +(1-a)n+(0-a~B-ne ; Using the face that ay and x must be ual on a balanced growth path eaves us with fyeany +(1-aa+(-a-B-), (1-aigy=(1-a)n+(1-a-B-Y)5, and hus the growth rate of output on the balanced growth path is given by (-a)nt a6 © ap eee pone “The growth rate of output per worker onthe balanced growth path is gow =g0? 9h BY = BY" Using equation (5) andthe fact that L grows at rate n, we ean write veg (i-aat(-a-B-Ye- (-alnr(1-a~B-yg-C-a)n Bie ae ‘And thos finally © WR a-B. Ta ‘Equation (6) ie tdentcal to equation (1.50) inthe text. 0