US saving and government deficits This question continues the logic of Problem 9 to explore the implications of the US government budget deficit for the long-run capital stock. The question assumes that the United States will have a budget deficit over the life of this edition of the text.

a. The World Bank reports gross domestic saving rate by country and year. The website is https://data.worldbank.org/indicator/NY.GNS.ICTR.ZS. Find the most recent number for the United States. What is the total saving rate in the United States as a percentage of GDP? Using the depreciation rate and the logic from Problem 9, what would be the steady-state capital stock per worker? What would be steady-state output per worker?

b. Go to the most recent Economic Report of the President (ERP) and find the most recent federal deficit as a percentage of GDP. In the 2018 ERP, this is found in Table B-18. Suppose that the federal budget deficit was eliminated and there was no change in private saving. What would be the effect on the long-run capital stock per worker? What would be the effect on long-run output per worker?

c. Return to the World Bank table of gross domestic saving rates. How does the saving rate in China compare to the saving rate in the United States?

Data From Problem 9:-

For the production function, Y = 2K 2N equation(12.9) gives the solution for the steady-state capital stock per worker.

a. Retrace the steps in the text that derive equation(12.9).

b. Suppose that the saving rate, s, is initially 15% per year, and the depreciation rate, d, is 7.5%. What is the steady state capital stock per worker? What is steady-state output per worker?

c. Suppose that there is a government deficit of 5% of GDP and that the government eliminates this deficit. Assume that private saving is unchanged so that total saving increases to 20%. What is the new steady-state capital stock per worker? What is the new steady-state output per worker? How does this compare to your answer to part (b)?

Transcribed Image Text:

K S N N (12.9)