Economics 1393: Poverty and Development
Problem Set 2: Technical Progress and Endogenous Growth
Due: Monday 16 October in class
Please answer the questions concisely. Please limit your problem sets to less than 4 pages (the problems look long but the answers are short). Handwritten answers are fine, but please make them legible. Partial credit will be awarded for partially correct answers. Good luck!
1. (30 points) Measuring Technical Progress (A little warmup) – Refer to section 4.4.5 in
Debraj Ray
Let’s say that Country X grew by 6% in 2005, the capital stock grew at a rate of
3% and the population grew at 2%. Assuming the following production function:

What is the elasticity of capital? (Remember,)

What is the elasticity of labor? ()

What is the Total Factor of Productivity Growth (TFPG)? ()

What is the most significant factor driving growth in this country?
2. (30 points) Endogenous Growth
From the endogenous growth model presented in Lectures 4 and 5, the following equations were generated:
And
Where:
g = Growth rate
n = Labor force in R+D
L = Total labor force
a = Contribution of intermediate good in output
= Size of innovation
= Probability of innovation
q = Probability of expropriation

Based on the above endogenous growth model, generate 3 implications /predictions about growth and/or technical progress that we can use for empirical tests of the model. Be sure to relate your answer to specific policy prescriptions.

How do these predictions accord with the view on the “East Asian tigers” spelled out in DR’s Chapter 4?
3. (40 points) Endogenous Growth and Convergence
In addition to the two equations in the model for n and g above, the model also yields the following dynamic equation for productivity level:. Where is the proximity of a country’s productivity level to that of the frontier, i.e., where is the frontier level of technology of the world and is the level of technology of a specific country. This model can be represented below diagrammatically:

Explain why there is club convergence according to this model (Give an intuitive explanation and supplement using math and/or the graph).

What are the ultimate factors that determine whether countries are in the club or not?

China is growing while Africa is not. Can you explain this disparity on the basis of the endogenous growth models?
