Question
The following are data on Country A's (i) Gross Domestic Savings as a % of GDP and (ii) Annual Growth Rate of GDP (in %).
The following are data on Country A's
(i) Gross Domestic Savings as a % of GDP and
(ii) Annual Growth Rate of GDP (in %).
Gross domestic savings (% of GDP) GDP grown (annual %)
2001 - 31 2001 - 4
2002 - 28 2002 - 4
2003 - 33 2003 - 5
2004 - 29 2004 - 5
2005 - 29 2005 - 6
(a) Calculate v, the estimated capital:output ratio for 2001 using the savings rate, s, and growth rate, g, using data for 2001. Assume that d, (the rate of depreciation of existing capital) is 5% and constant over all the years.
(b) Using this estimated ratio and the savings data for each of the following years: 2002 to 2005, calculate the predicted growth rate of GDP for each year from 2002 to 2005. Keep assuming that d = 5%. How well do the predicted growth rates match the actual growth rates?
(c) Now calculate v = the estimated capital: output ratio for each of the years 2002 to 2004. Then using the estimated value of v for 2002, and savings data for 2003, calculate the predicted growth rate of GDP for 2003; then using the estimated value of v for 2003, and savings data for 2004 calculate the predicted growth rate for 2004 and so on.
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