ECON10003 Introductory Macroeconomics 1

ECON10003
INTRODUCTORY MACROECONOMICS
SEMESTER 2, 2020

TUTORIAL 8
WEEK STARTING SEPTEMBER 28TH, 2020
TUTORIAL TASKS
THE TUTORIAL
This week’s tutorial examines an introduction to economic growth, the use of the
production function in economic growth, and the Solow-Swan model. Please discuss
these questions with members of your study group prior to attending tutorials.

READING GUIDE
Review chapters 11, 12.1-12.3 and 13 of BOF (4th edition) or Chapter 13, 14.1-14.3
and 15 of BOFAH (5th edition) as preparation for this tutorial. You should also look
carefully over your lectures notes for Week 8.

1. In the context of the Solow-Swan model, use a diagram, to show the

qualitative effect of an increase in the population growth rate, n, and an
increase in the level of technology, A upon the steady state level of output per
capita. Do these results seem sensible to you?

2. If we look at economic history, we see that growth rates of output per capita
were typically very low prior to the 1750s. In the post-1750 period, a set of
countries has attained sustained growth in output per capita of about 2 per cent
per year. In the context of the Solow-Swan model, what changes could
account for a sustained increase in economic growth in the post-1750 period?

3. Suppose we consider a production function with the following functional

form, Y = AK . In this case, A is the level of technology and K is the level of
capital stock. There is no role for labour and recall that capital accumulates
according to the following equation:
K t +1=( 1−d ) K t + I t.
a) Maintain the standard assumption that investment is equal to a constant
proportion of output. That is I t=θ Y t . Use the above information to derive
an equation that describes the growth rate of capital stock for this
economy.

b) Does this economy have a steady state of capital? If not, what will happen
to this economy over time? What is the key difference between this
environment and the Solow-Swan model that we discussed in lectures and
the textbook?

Tutorial Tasks