Long Run Growth

The purpose of this exam is to help you prepare for econometric work you will do for your term paper. This exam will be

done in the lab using Excel but you are being given the opportunity to work on this at home in advance. I will be

available in the lab to help you when you get lost, but you may not help each other. In the end I will be grading the excel

file that you will submit to me directly. This assignment is worth 10% of your final grade.

You may not bring an electronic file into the lab with you and you will be working independently.

In this exam you are being asked to write a simulation of the Solow Model we have been learning in class. You can

choose your own parameter values for population growth (n), depreciation (d), capital share of output (a), the savings

rate (s) and the growth rate of technology (g). In the lab I will give you the parameters I wish for you to use that day.

Assume that the size of the labour force is exactly L=10, that technology is initially A=1 and the production function is

Cobb-Douglas (that is that Y=AKaL1-a).

a) Prepare an excel spreadsheet with the following columns:

1.   Capital (K)
2.   Output (Y)
3.   Capital per efficient unit of labour (k)
4.   Output per efficient unit of labour (y)
5.   Total savings
6.   Break even investment

In the column for capital generate 50 rows starting with K=0 in the first row and ending with K=50 in the final row (so

that each row represents an increase in the level of capital by one unit).

Your results should include a well-labeled chart that illustrates the solution the model, as well as the data used to

generate the chart. Please indicate the steady state with a line that shows level of k* on the horizontal axis.

b) Now allow the savings rate to increase and repeat the exercise in part a). Calculate the level of consumption to tell me

if people are better off or worse off in the long run with the new, higher, saving rate.

c) Now allow the population growth rate to decrease and repeat the exercise in part a). Calculate the level of

consumption to tell me if people are better off or worse off in the long run with the new, higher, saving rate.

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