Question 1 a. Consider a production function exhibiting constant returns to scale for country 1 and 2. On separate well labeled graphs show each of the following: (3x1 = 3 marks) i) Differences in...

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Question 1


a. Consider a production function exhibiting constant returns to scale for country 1 and 2. On separate
well labeled graphs
show each of the following: (3x1 = 3 marks)



i) Differences in output per worker between 2 countries due to differences in factor accumulation.



ii) Differences in output between 2 countries per worker due to productivity differences between the countries.



iii) Differences in outputs between 2 countries for both i) and ii).


b. Given the 3 scenarios which graph is the
most
likely candidate to demonstrate the Catch-Up Effect and why?



c. This question is an application of Rule of 72. Consider a country for which GDP per capital doubles every 50 years. Calculate the annual growth rate for this country. Consider another country for which GDP per capita doubles every 25 years. Calculate the annual growth rate for the second country. Given everything else constant, calculate in how many years catch up effect will occur between the two countries when initially, the first country’s GDP per capita is 4 times that of the second country? Explain your answer


Question 2


a. Explain the impact of rise in
rate of
capital dilution (based on population growth = n) on the speed of convergence to steady state in the context of Solow growth model. Explain in terms of the change in the speed of convergence equation
with properly explained notations
and a
well labeled
graph as explained in the appendix for Chapter 3 to answer this question. (3 +3 = 6 marks)



b. Use a
well labeled graph
depicting the Malthusian model to show what happens to a country’s population size and per capita income
in the short run and in the long run
due to COVID-19 in which productivity of workers is adversely affected suggesting less output is produced now (Y is falling). Explain your answer in few sentences. (4 marks)













Answered Same DayJul 09, 2021

Answer To: Question 1 a. Consider a production function exhibiting constant returns to scale for country 1 and...

Komalavalli answered on Jul 09 2021
145 Votes
4
QUESTION 1 10 marks.    
EXPLAIN YOUR ANSWERS AND SHOW YOUR STEPS AND CALCULATIONS TO AVOID GRADE PENALTY.
Suppose there are only 2 goods produced in world: Traded (T) and Non Traded (NT) in 2ountries A and B. The following table shows the i
nformation on the production and price of T and NT in A and B.
    COUNTRY
    T produced per capita
    NT produced per capita
    Price of T in local currency
    Price of NT in local currency
    A
    200
    800
    20
    35
    B
    600
    2400
    30
    60
a. Calculate the PPP exchange rate between the two currencies where you are expressing the exchange rate as one unit of currency A in terms of currency B. (2 marks)
ANSWER SPACE:
    COUNTRY
    T produced per capita
    NT produced per capita
    Price of T in local currency
    Price of NT in local currency
    A
    200
    800
    20
    35
    B
    600
    2400
    30
    60
PPP of T goods of country w.r.t country A = Price of T good in currency B/Price of NT good in currency A
PPP of TNT goods = 30/20
PPP of TNT goods = 1.5
Therefore, the purchasing power parity ratio of the exchange for non traded goods is 1unit of currency A = 1.5 unit of currency B.
b. What is the ratio of GDP per capita in A and B using the PPP exchange rate? (2 marks)
ANSWER SPACE:
GDP per capita of country A = Price of T in country A* T produced per capita + Price of NT in country A* NT produced per capita
GDP per capita of country A = 20*200+35*800
GDP per capita of country A = 4000+28000
GDP per capita of country A = 32000
    GDP per capita of country B = Price of T in country B* T produced per capita + Price of NT in country B* NT produced per capita
GDP per capita of country B = 30*600+60*2400
GDP per capita of country B = 18000+144000
GDP per capita of country B = 162000
GDP per capita of country B using ppp exchange rate = 162000/1.5
GDP per capita of country B using ppp exchange rate is 108000
Ratio of GDP per capita in A and B using the PPP exchange rate = 32000/ 108000
Ratio of GDP per capita in A and B using the PPP exchange rate is 2.96
c. Now suppose the Non Traded item also gets traded between the countries. The trade pattern is such that 1 unit of T is sold by Country A to obtain 2 units of NT from country B. Calculate the Nominal exchange rate expressing 1 unit of Currency A in terms of currency B. (HINT: find the price of 1T in terms of Country A’s currency and price of 2 NT in terms of Country B’s currency. Given the suggested trade pattern find the nominal exchange rate). (2 marks).
ANSWER SPACE:
Price of 1T in terms of Country A’s currency is 20and price of 2 NT in terms of Country B’s currency is 120
Nominal exchange rate = 20/120
                                                
            = 0.17
Nominal exchange rate of 1unit of currency A = 0.17 unit of currency B.
                            
d. Given your answer in part c, calculate the ratio of GDP per capita between country A and B. (2 marks)
ANSWER SPACE:
GDP per capita of country A = Price of T in country A* T produced per capita + Price of NT in country A* NT produced per capita
GDP per capita of country A = 20*200+35*800
GDP per capita of country A = 4000+28000
GDP per capita of country A = 32000
    GDP per capita of country B = Price of T in country B* T produced per capita + Price of NT in...
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