QUESTION 3: Growth Accounting (20 marks] Suppose output is given by the production function Y data: = AK0.30 N0.70. We have the following K/N Y/N H Australia 1950 2017 73000 440000 29000 2.67 95000 3.52 Japan 1950 2017 13000 340000 5400 2.29 75000 3.57 where K/N and Y/N are in real US dollars, and H is an index of human capital based on years of schooling and return to education. (a) Calculate the level of TFP in 2017 for each country. Which country has the higher level of TFP in 2017? (4 marks) (b) Consider the source of growth in output per worker for each country between 1950 and 2017. Use the growth accounting methodology to allocate growth in output per worker to TFP growth and capital accumulation. Which factor is more important in accounting for growth in output per worker in each country? Which country has the faster growth rate of TFP between 1950 and 2017? (6 marks) (c) Now suppose that the true production function is Y = AK0.3 (NH)(0.7). With this new production function, find how your answers in part (a) change. What is the potential problem if we use the wrong production function as in part (a) to estimate the level of TFP? (4 marks) (d) Consider the source of growth in output per worker for each country between 1950 and 2017 using the production function in part (c). In which country is human capital accumulation more important in accounting for growth in output per worker? (6 marks) QUESTION 3: Growth Accounting (20 marks] Suppose output is given by the production function Y data: = AK0.30 N0.70. We have the following K/N Y/N H Australia 1950 2017 73000 440000 29000 2.67 95000 3.52 Japan 1950 2017 13000 340000 5400 2.29 75000 3.57 where K/N and Y/N are in real US dollars, and H is an index of human capital based on years of schooling and return to education. (a) Calculate the level of TFP in 2017 for each country. Which country has the higher level of TFP in 2017? (4 marks) (b) Consider the source of growth in output per worker for each country between 1950 and 2017. Use the growth accounting methodology to allocate growth in output per worker to TFP growth and capital accumulation. Which factor is more important in accounting for growth in output per worker in each country? Which country has the faster growth rate of TFP between 1950 and 2017? (6 marks) (c) Now suppose that the true production function is Y = AK0.3 (NH)(0.7). With this new production function, find how your answers in part (a) change. What is the potential problem if we use the wrong production function as in part (a) to estimate the level of TFP? (4 marks) (d) Consider the source of growth in output per worker for each country between 1950 and 2017 using the production function in part (c). In which country is human capital accumulation more important in accounting for growth in output per worker? (6 marks)
