In the early 1990s, the high growth rates experienced in the Hong Kong

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Problem 1:

Growth Accounting In the early 1990s, the high growth rates experienced in the Hong Kong and Singapore led these economies to be dubbed as part of the East Asian Growth Miracle. Looking at these economies, a student argues that all that is needed for rapid continuous growth is heavy investment in capital and maintaining a high capital to output ratio. In this question, you will investigate if this statement is true. a Download the dataset hkg_sgp_data.xls from Canvas. Calculate GDP per capita and capital per person for each of the two economies in the dataset for the years 1960-2014. You do not need to print out or submit your answer for part a).

b For each economy, do a scatterplot of the growth rate in GDP per capita against the capital to output ratio. What trend do you observe?

c Let's try to understand the trend in part b). Consider the following production func- tion, Y = zKN1-a. Note here I am identifying population N with labor supply. First write down what output per capita, y = Y/N is in terms of z, k, a where k = K/N. Suppose z is constant. At low levels of k, is the rate of change in output per capita wrt capital per capita, i.e. small or large? What about at high levels of k?

d Now let's do some growth accounting. We want to understand the percentage of growth that can be explained by growth in k. Observe that we can write lny = lnz+alnk. Recall that we can measure the growth rate in GDP per capita with the change in logs, i.e. gylnyt+1-In yt. Using your production function, back out the growth rate in z for each economy. In a table, report the average growth rates of y, k, z for the periods 1960-1969, 1970-1979, 1980-1989, 1990-1999, 2000-2009 and for the years 2010. You may assume a = 1/3.

e What percentage of growth can be explained by capital growth for each of those time periods? What percentage of growth can be explained by z for each of those time periods? Together with your answers in part b) and c), do you think the student's statement is true?

 

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