Download E-Growth Exercise #4 Answers

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E-Growth Exercise #4 Answers (
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Please limit your answers to the spaces provided. If necessary, write on the back of the page.
Do not attach printout or additional pages. All questions pertain to the E-Growth module in the
SimEcon® software package.
Make sure that you have read the “E-Growth Manual” and “SimEcon® Operation
Instructions.” These materials may be found at the Class Web site prior to beginning the
exercise. For many of the exercise’s questions, it will be necessary to refer to those instructions.
For many of the exercise’s questions, it will be necessary to refer to your text.
Open the E-Growth Module of SimEcon®. You will see a table entitled, “Initial State of Your
Society -- Generation 0.” Write down the values for the initial parameters below:
Population:
Real GDP:
Consumption Spending:
Investment Spending:
Public Goods Spending:
100 million
$ 100 billion
$ 70 billion
$ 12 billion
$ 18 billion
Click “Continue.” You will see a table for “Social Variables”. Enter 23 years as the age of first
marriage, 1.9 children and 0.12 spent on research and development. Click “Continue.” You will
see a table for “Economic Variables”. Enter $13 billion for investment and $19 billion for public
goods. Click “Continue.” Fill in the table below:
Change in Population:
Real GDP:
Real GDP Per Capita:
Real Capital Stock:
- 4.13 million
$ 129.67 billion
$ 1,352.60
$ 113.00 billion
What is real GDP? Real GDP represents the inflation-adjusted value of all final goods and
services produced in an economy during a given year. What is the difference between real
GDP and real GDP per capita? Real GDP per capita is real GDP divided by the population.
Suppose that over a period of 10 years real GDP of a given nation doubled and the population
over that same time period tripled. Would real GDP per capita increase, decrease or remain the
same? Real GDP per capita would decrease. Which statistic is a truer measure of the real
standard of living for a given nation? Real GDP per capita.
Given the information in the above tables, what is the percentage growth rate (or decline) of real
GDP? An increase of 29.67%. What is the percentage growth rate or decline of real GDP per
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E-Growth Exercise #4 Answers
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capita? An increase of 35.26%. Has the standard of living improved or gotten worse or stayed
the same in this nation? The standard of living has improved.
How did the change in the age of first marriage affect this? The age of first marriage
increased from 21 to 23. When people get married at a later date they have more time to
increase their human capital through education. More human capital means more output.
When people marry later women tend to spend more time in the market labor force, where
their output is measured by real GDP instead of in spending the time in household
production where output is not counted in real GDP. Further, for any given desired
number of children, the later people start having children the fewer they actually have.
Finally, with fewer people and workers, output per worker is larger.
How did the change in research and development spending affect the standard of living? More
research and development improves the available technology so that workers and other
factors become more productive. This increases output.
How did the change in investment spending affect the standard of living More investment
means that there will be more physical capital available for future generations. A larger
capital stock generates more output.
How did the change in public goods spending affect the standard of living? More public goods
spending creates more and better physical infrastructure for the economy. With better
transportation and communication systems workers and factories are more productive. On
the other hand it also means more hospitals, sewers, trash pickup and waste disposal. All
those things prolong life expectancy and allow more children to grow up. That reduces real
GDP per capital, though by other measures it raises the standard of living.
Click “Continue.” You will see a table titled, “Economic Variables.” Enter the following
amounts: (1) Investment Spending -- $9 billion; and (2) Public Goods Spending -- $16 billion.
Note that your values for social variables will remain the same as the last generation. Click
“Continue.” Fill in the amounts for the table below:
Change in Population:
Real GDP:
Real GDP Per Capita:
Real Capital Stock:
- 3.52 million
$ 129.26 billion
$ 1,399.66
$ 122.00 billion
Compared to the last generation, have the amounts spent on investment and public goods
increased, decreased or remained the same? Decreased. What is the new percentage rate of
growth or decline in real GDP? (Calculate from the first generation to this one.) A decline of
0.32%. How did the changes in investment and public goods spending cause this new growth
rate or decline? There was less investment in this generation so the capital stock per worker
declined, making workers less productive. There was less public works spending, so the
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infrastructure declined in quantity and quality. This lowered the productivity of workers
as well, though by reducing life expectancy it raises real GDP per capita. What is the new
percentage rate of growth or decline in real GDP per capita? (Calculate from the last generation
to this one.) There has been a growth rate of 3.48%. Why did real GDP decline while real
per capita GDP increased? The total output of the economy did fall. However, population
declined even more, so that there were fewer mouths to feed. Each person got more..
Click “Reset All Variables.” You will go back to the table titled “Social Variables.” Suppose
that this country enacted strict measures to control population growth and industrialize the
economy. For example, China limits all couples to only one child per family. A couple will face
strict legal sanctions if they try to have more than one child. Suppose also that in our nation no
one was allowed to marry before a certain age.
Enter these amounts for the social variables: (1) Age of Marriage -- 25 years; (2) Number of
Children -- 1.75; and (3) Percentage Spent on R & D -- 0.16. Click “Continue.” Use the default
variables for the economic variables: (1) Investment Spending -- $12 billion; and (2) Public
Goods Spending -- $18 billion. Click “Continue.” Fill in the amounts for the table below:
Change in Population:
Real GDP:
Real GDP Per Capita:
Real Capital Stock:
- 7.54 million
$ 158.08 billion
$1,863.88
$ 134.00 billion
Compared to the last generation, what was the percentage growth rate of real GDP? Real GDP
increased by 22.30%. Compared to the last generation, what was the percentage growth rate of
real GDP per capita? Real GDP per capita increased by 33.17%. Considering economic
growth, would you refer to this situation as a depression, a recession, stagnation or prosperity?
Prosperity. Would you refer to this nation as impoverished, stagnant or rapid growth? This
nation is rapidly growing. Disregarding the political measures discussed earlier and
considering only the rate of economic growth, which of the following five nations would provide
a good example of the above situation? (1) the United States; (2) Great Britain; (3) Bangladesh;
(4) South Korea; or (5) Central African Republic. South Korea would provide the best
example, since it has been rapidly growing.
Click “Reset All Variables.” Now, suppose that this nation imposed even more draconian
measures to increase economic growth. Enter the following social variables: (1) Age of
Marriage -- 40; (2) Number of Children -- 1.75; and (3) Percentage Spent on R & D -- 0.20.
Click “Continue.” Enter the following economic variables: (1) Investment Spending -- $35
billion; and (2) Public Goods Spending -- $35 billion.
Change in Population:
Real GDP:
Real GDP Per Capita:
Real Capital Stock:
- 29.72 million
$ 304.22 billion
$ 5,521.74
$ 169.00 billion
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Compared to the last generation, what was the percentage growth rate of real GDP? Real GDP
increased by 92.45%. Compared to the last generation, what was the percentage growth rate of
real GDP per capita? Real GDP per capita increased by 196.25%. Would it be correct to say
that in this generation real GDP per capita almost tripled? Yes (Yes, No). Looking at the above
situation, what are the major drawbacks in terms of to living in a society such as this? (Consider
marriage, population growth, military power and the age distribution of the population.) First of
all, the average person gets married at age 40. That would impose a psychological and
mental hardship on people who are in love, and at that age they may not even get the
average 1.75 children they want. Second, the population declined by 29.72 million.
There would very relatively few children in this society, which some people would consider
to be sad. Finally, the loss of population might impact the nation’s military power in that
there would be much fewer people available to serve as soldiers. The age distribution of
the population would be much older.
Click “Continue.” You will see the table titled “Economic Variables.” Accept the default
amounts: (1) Investment Spending -- $12 billion; and (2) Public Goods Spending -- $18 billion.
The social variables will remain the same. Click “Continue” to get “Generation 5 Results.”
Click “Continue” two more times to get “Generation 6 Results.” This will also use the same
social and economic variables. Now, click “Graph.” This will produce a graph of the economic
growth of this nation over all six generations. Draw this graph below.
GDP
Per Capita
Generations
Why did the per capita GDP grow slowly over the first few generations and why did per capita
GDP grow so rapidly over the last generations? During the first several generations the
population declined, but by small percentages. Over the last generations, the population
declined by much larger percentages because the average age of first marriage was
increased to unrealistic levels. This provided each person with a much larger share of the
economic pie.
In the E-Growth module of the SimEcon® program, growth in population seems to be inversely
related to changes in per capita GDP. In the 19th century, an economist named Malthus predicted
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that world population would grow at a geometric pace while agricultural production would
only grow at an arithmetic (slower) pace. He predicted that because of this after several
generations, most of the world’s population would be impoverished. Did his ideas prove correct
or incorrect? Incorrect. Why? Although population did grow at a geometric pace,
agricultural, manufacturing, transportation and communication technologies grew even
faster, productivity increased so the standard of living actually grew instead of declining.
What might be some of the advantages of increasing population in terms of the labor force? If
there are increasing returns to scale in many industries.
Considering the population decline in Generation 4, how would that affect the size of the
workforce? There would be many fewer workers. How would that affect the supply and/or
demand for labor? The supply of labor would be reduced. Other things being equal, how
would that impact the equilibrium wage? The equilibrium wage would tend to rise, because
with less labor relative to other resources the marginal productivity of labor will be higher.
Finally, how would that change in the wage rate affect the workers’ real incomes, other things
being equal? Workers’ real incomes would tend to rise.