Homework 2 Name: ____________________ PSU E-Mail: ________________ Purpose: The homework gives you further practice with the topics of Section 2. All the problems involve actual countries experiencing economic growth. Directions: Please hand this homework in at the start of class on Monday, October 20. Please type your answers to make your work easier to grade. Also, so we have an accurate record of who turned it in, please also submit it to the “Dropbox” in Angel’s Homework Section. Please do this submission in Microsoft Word format (i.e. .doc or .docx) or Adobe pdf format (note that Macs can do this too). Finally please include your name in the filename of the upload. You may work with others but you must write up your own answers. Be sure to show your calculations and to briefly yet carefully explain your answers. There are 10 questions. To make this a 20 point homework each question is worth 2 points. You’ll need this data for questions 1 and 2. In class we had the following table that described portions of the U.S. economy for 1959 and 2011. These data include labor productivity (Y/L), total factor productivity (we use the symbol “A” for TFP; recall is measures technology), and the capital to labor ratio (K/L). Recall that they’re all related by this equation: Y/L = A • (K/L).3; thus, labor productivity is explained by technology and the capital to labor ratio. As in class, as labor productivity, Y/L rises, real per capita GDP does as well. year Y/L A K/L 1959 $45,100 1,515 $81,700 2011 $111,050 2,837 $203,700 1. Calculate the impact of a 1% increase in A on Y/L in 2011. That is, by what percentage does Y/L change due to a 1% change in A? Now, do the same thing for a 1% increase in K/L for the same year. Which has the most impact on labor productivity? 2. In class on Friday, 10/10, we described how 76% of the increase in labor productivity over these years came from the increase in technology (i.e. A) and that 24% came from increases in K/L. Clearly, this says that the key to U.S. economic growth is increases in technology. How does this fact connect to what you calculated in the last question? The next two questions are based on “Making It in America” by Adam Davidson in our “Macroeconomics Supplement.” 3. Please explain all the factors that are causing the per-worker production function, as applied to U.S. manufacturing, to shift up. 4. The article describes how capital in factories is changing. These changes are designed so that each individual worker needs less human capital than factory workers in years past. True or false? Please explain your answer. On a worksheet you calculated that over the last 150 years U.S. growth rate was about 2%. This was also about the rate seen since the late 1950s, which connects to the survey of the oldest person you could find. That is, after taking away inflation (“real”) GDP per person grew at this rate on average per year. Meanwhile, former President George W. Bush is promoting changes that he argues will increase the growth rate to 4%. This is the basis for the next two questions. 5. Let’s assume that like the average Penn State grad that you make $50,000 at your initial job. We’ll also assume that you’ll work for 45 years and that your real pay grows at the same rate as real per capita income in the U.S. If the U.S. growth rate does indeed change from 2% to 4%, how much more would you earn per year in your last year of work? Hint: the formula you need here was mentioned when we developed the formula to measure average annual rates of growth. 6. Do you think you would notice this (if indeed you could see both outcomes)? South Korea is one of four so-called “Asian Tigers.” The other three are Taiwan, Hong Kong, and Singapore. In class we’ve touched on Hong Kong (as an example of a rich place with few natural resources) and S. Korea (in a comparison to N. Korea – recall the picture from space at night). These four have grown very quickly in the last few decades and now have per capita GDPs near or even greater than that of the U.S. To the right is map of the region with these four marked in red. Please use this table for S. Korea the following the next three questions. 7. What was the average annual growth rate in income per person? Is it about what you would expect? 8. Compute the capital to labor ratio for both years. By what percentage did it increase between 1960 and 2010? 9. Compute total factor productivity (sometimes called “A,” which measures technology) for both years. First, recall the formula for labor productivity, Y/L = A • (K/L).3 and then recall the definition of technology: something that can increase Y/L with no change in K/L. Given the available data, compute A for both years. By what percentage did it increase between 1960 and 2010? 10. From your answers to 9 and 10, what seems to be the major reason for Korean economic growth?