Economic Growth Assignment - Desklib

This article discusses the impact of various factors on economic growth such as earthquakes, wars, diseases, taxes, and wealth. It provides solutions to questions related to steady state, capital stock, labour force, and savings. The article also includes figures and equations to explain the concepts.

Running head: ECONOMIC GROWTH ASSIGNMENT
Economic Growth Assignment
Name of the Student
Name of the University
Author Note

1ECONOMIC GROWTH ASSIGNMENT
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................2
Question 4........................................................................................................................................3
Question 5........................................................................................................................................4
Question 6........................................................................................................................................5

2ECONOMIC GROWTH ASSIGNMENT
Question 1
An earthquake would lead to a fall in the capital stock but given that there has been no death then
the capital per labour falls which leads to the overall output of the economy but the output per
labour rises.
Question 2
Due to war when a part of the labour force is destroyed it would lead to more capital stock per
worker and this would lead to the economy to be on a higher steady state from where it was
before the war.
Question 3
An increase in diseases like AIDs will lead to a fall in the labour force. This will lead to an
increase in the capital per worker, which will move the economy to a new steady state as shown
in figure 1.

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Figure 1
Source: Created by Author
Question 4
The implication of taxes reduces the steady state level or the growth rate as consumers now have
lesser amount in their hands to spend and the saving rate increases but this effect is not
permanent (Epstein 2016) .
Gt = Tt
Y d
t = Yt – Tt
Ct = (1 − s)Y d
t
Kt+1 = It + (1 − δ)Kt
(1 + n)kt+1 = s(yt − τt) + (1 − δ)kt
k t+1=s (k α
t τ β
t −τ t)+(1−δ)k t
1+n
Steady state condition: s(k α τ β − τ ) = δk

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Figure 2
Source: Created by Author
Question 5
(a) The steady state figure would look like figure 2 in case of a high lump sum tax but it will
remain unchanged if the tax is less. This is because the government will be buying goods
with the tax receipt, which will increase the available capital in the economy so there will
be no shifts from the steady state. However if the tax is of a large amount there will be a
shift as the disposable income in the hands of individuals will fall and they will have less
savings leading to a lower steady state.
(b) When the lump sum tax is high the steady state capital level falls due to a fall in the
savings. If we start from the left of the steady state level, we will have to raise the capital
amount to the prevailing steady state by saving more. Conversely if we are on the right

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then our level of capital investment is higher than what the economy requires for
achieving growth and therefore we need to cut down on our savings and consume more.
Figure 3
Source: Created by Author
Question 6
In the presence of wealth, people have less incentive to save and therefore the steady state is
lower. Therefore from figure 4 it can be seen that when h=0, the steady state is higher but when
h>0, the steady state shifts as people are not forced to save due to the wealth available to them
(Weiss 2015).

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Figure 4
Source: Created by Author
gdp= f(k)
gnp = (r+δ)h + w
w = f(k) - k f ' (k) = f(k) - (r+δ) k
ḣ= s[(r + )h+ w] -(n+ g + )h
By setting ḣ = 0, the steady state can be solved as below
h = ws
n+δ −s( r+ δ ) = s(1−α)
n+δ −s( r+ δ )

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References
Epstein, Gene. "A" Sort of Intellectual Sleight of Hand": How Nobel laureates Paul Krugman,
Robert Solow, and Joseph Stiglitz praised Thomas Piketty's Capital in the Twenty-First Century,
and what that tells us about the state of 21st century economics." The Review of Social and
Economic Issues 1, no. 3 (2016): 95.
Weiss, Janosch. "The Effects of Productivity Growth, Population Growth, and the Rate of
Interest on the Distribution of Wealth." (2015).