F # ASSIGNMENT

In the late 90s it was observed that the relative price of equipment (capital) has declined at an average annual rate of more than 3 percent. There has also been a negative correlation (-0.46) between the relative price of new equipment and new equipment investment. This can be interpreted as evidence that there has been significant technological change in the production of new equipment. Technological advances have made equipment less expensive, triggering increases in the accumulation of equipment both in the short and long run. Concrete examples in support of this interpretation abound: new and more powerful computers, faster and more efficient means of telecommunication and transportation, robotization of assembly lines, and so on. In this problem we are going to extend the Solow Growth Model to allow for such investment specific technological progress. Start with the standard Solow model with population growth and assume for simplicity that the production function is Cobb-Douglas: Yt = Kt L1t , where the population growth rate is deltaLt/Lt= n. Similarly, just as in the basic model, assume that investment and consumption are constant fractions of output It = sYt and Ct = (1 s)Yt. However, assume that the relationship between investment and capital accumulation is modified to:

Kt+1 Kt = qtIt Kt

where the variable qt represents the level of technology in the production of capital equipment and grows at an exogenously given rate , i.e. deltaqt / qt= . Intuitively, when qt is high, the same investment expenditure translates into a greater increase in the capital stock. (Note: another way to interpret qt is as the inverse of the relative price between machinery and output: when qt is high, machinery is relatively cheaper). (a) Transform the model (the production function, the equations for consumption and investment, and the capital accumulation equation) in per-worker form.

c) Suppose that capital per worker kt grows at a constant rate (we do not know that yet, but we will make a guess). Divide the capital accumulation equation by kt and use this assumption to prove that qtk1t has to be constant over time.

Data on the Puerto Rico labor market.

The objective of this activity is to understand the labor data of Puerto Rico. You should read the most recent report from the Department of Labor and Human Resources that is included in the assignment. (www.trabajo.pr.gov). Based on the data in the report, you must answer the questions given about the relevant aspects of that period.

Questions:

A. How jobs are distributed by educational level and by occupational group

B. Present the change in the unemployment rate from the month and the previous year.

C. Present the labor participation rate and its most recent changes.

D. Compare the labor participation of men versus women.

E. What it means to be out of the job market and its latest data and changes.

F. What activities do the people included in that group engage in?

To search the information on the internet, you must follow the following steps: www.trabajo.gobierno.pr.gov select the labor market tab at the top of the page select the information called Latest, Monthly Releases.

Consider the full version of the Solow model with both population growth and technology: Yt = F(Kt,LtEt). We will extend this version of Solow to also explicitly include the government. The national income accounts identity becomes: Yt = Ct + It + Gt where Gt is government spending in period t. In order to fund its spending the government collects a tax Tt. Suppose for simplicity that the government runs a balanced budget Gt = Tt and that the tax collected is a constant fraction of output: Gt = Tt = Yt. The remaining disposable income for households each period is (1 )Yt. As in Solow we still assume that households save/invest a constant fraction s of their (now disposable) income. The population growth rate is n, techonology grows at g, and the depreci... you are an influential CEO of a company like Wal-Mart, who imports foreign made clothing. The government wants to restrict the quantity of the product that your company imports. Should you use your political influence to lobby the Congress to impose a tariff (import tax) on the product? (5 Marks) or should you use your political influence to lobby the Congress to impose quota (maximum amount of the import) on the product?

Suppose Canada is a closed economy and in its long-run equilibrium initially. The government increases its subsidy to new capital investment projects. At the same time, the shortage of computer chips/semiconductors forces many manufactures to delay their spending on replacing depreciated machinery and equipment.

In the context of the long-run classical model, examine the effects of the above events on the following variables in the long run:

output real interest rate national savings real rental price of capital price level Explain and support your answer by ONE diagram for the market of loanable funds and ONEdiagram for the rental market for capital.