Study Questions for Week 3 Tutorial (Aug 25th/26th)

WW2 significantly reduced the factor of accumulation for France

and Japan, but Japan stayed ahead of US due to its huge
advances in Tech, which is the fudge factor in the aggregate
production function.

1) Between 1950 and 1973, France and Japan experienced GDP per capita growth rates that were
at least two percentage points higher than those in the United States. Yet the most important
technological advances of that period were made in the United States. From 1973 to 1985,
growth rates in Japan remained significantly higher than those in the United, but growth in
France slowed significantly. Use the concepts of factor accumulation, diminishing returns to
capital, steady state capital, and technology diffusion to explain this.
Make use of the following information in your answer:
a) World War II destroyed a significant portion of the physical capital stock in France and
Japan, but not in the United States.
b) Japan was significantly behind the United States in terms of technological development
circa 1950. Technology in France, on the other hand, was only slightly behind the United
States.
2) Consider the following statement: The Solow growth model shows that the savings rate does
not affect the growth rate in the long-run, so permanently increasing the savings rate by 3%
wouldnt have any major effect on living standards 30 years from now.
GDP growth will increase if saving rates increase.

a) Explain why you agree or disagree with the above statement as it applies to each of the
following
initial conditions.
Saving too much: Leads to lower
consumption
per worker. The GDP growth will still
increase but the living standards will drop accross the maximum potential output of the
The capital
is at the steady-state level and the savings rate is above the
economy is still capped by other i.factors
such asstock
technology.

golden-rule level.

Steady state:Investing just enough to keep capital constant

ii. The capital stock is at the steady-state level and the savings rate is at the golden
rule level.
For GDP growth will increase, and the living standards will decrease in the
current period but increase 30 years from now.

iii. The capital stock is well below the steady-state level and the savings rate is at
the golden rule level. Capital stock will move towards steady state level and hence, economy will
more well off in the future.Higher capital, higher output per worker etc.

iv. The capital stock is at the steady-state level and the savings rate is well below
the golden rule level.

It wouldn't affect golden rule. and hence wont have major effects in future.

b) Singapores central provident fund (CPF) is a compulsory savings plan for working
Singaporeans and permanent residents. Singapores CPF system was designed to
accelerate economic growth by increasing the national savings rate. How has
Singapores savings rate changed since 1960 (you could look here for this information
link to google public data)? How are the growth effects of the CPF system likely to differ
today from those when the CPF was first introduced in 1955? (Connect this to your
answer to the circumstances discussed in part a.)

The majority portion of GDP is made up of consumption in Singapore and since a huge part of GDP growth by SG is due to
savings, it has a smaller impact on consumption in the long run the growth may not be sustainable. Savings rate has
increased steadily and stabilized at around 50%.

In the Solow growth model, a steady state savings rate of 100% implies that all income is going to investment capital for future
production, implying a steady state consumption level of zero.Somewhere in between is the "Golden Rule" level of savings,
where the savings propensity is such that per-capita consumption is at its maximum possible constant value. Put another way,
the golden-rule capital stock relates to the highest level of permanent consumption which can be sustained.