Urban Economics

Questions & Answers

3. Use the standard assumption of Harrod-neutral technology to answer the following. According tothe World Bank, measured in terms of purchasing power parity (PPP), the living standard in theU.S. is approximately 7x that of the Philippines. a. In the Solow model, determine how the Philippine savings rate would need to compare with the U.S. savings rate in order to explain this difference. Assume that A, g, n ( = g.), and 8 are the same for the U.S. and the Philippines, so that differences in savings rates account for the entire difference in the level of living standards. b. Solow assumes that technical change is a public good, so that A and g are equally accessible to all countries. Given your finding in (a) is this assumption plausible? Explain

For the Harrod-neutral case, the multiplier effect of technical change on output is always one.Explain the intuition of why regardless of the magnitude of a, Harrod-neutral technical changealways results in the same equi-proportional increase in output.

1. In class, we discuss two quite different approaches to modeling technical change in long-run growth. The conventional approach, described in Ch. 2 of Jones and Vollrath, assumes that technical change is "purely labor augmenting” (i.e., Harrod neutral). The approach that we discussed in class assumes that technical change is Hick neutral also known as “invention neutral." Assume a Cobb-Douglas production technology, can be represented as either: Y = K (AL)¹-a(Harrod-neutral)(1) Y = AKⓇL¹-a(Hicks-neutral)(2) The necessary requirement for the Solow steady state is constant factor-income shares. This condition can be satisfied in either of two ways: A. Balanced growth of the factor inputs, i.e., the growth of the capital stock, g = g + ga, the-growth of the effective supply of labor, or B. A unitary K-L supply elasticity, i.e., o= 1. Letting the physical supply of the labor force be fixed, i.e., g = 0 (only to simplify the problem, not-alter its logic): a. Show how the Harrod-neutral version satisfies condition A. b. Show how the Hick-neutral version requires condition B. c. What is the implication for the generalized representation of technical change in the Solowmodel? Explain.

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