HE4002 Tutorial 1

Fall 2015
1. One view of technological progress is that the productivity of capital goods built at t depends
on the state of the technology at t and is unaffected by subsequent technological progress. This
is known as embodied technological progress. This problem asks you to investigate its effects.
(a) As a preliminary, let us modify the basic Solow model to make technological progress
capital-augumenting rather than labor-augumenting. So that in a balanced growth path exists, assume that the production function is Cobb-Douglas: Y (t) = [A(t)K(t)] L(t)1 .
= A(t).
Assume that A grows at rate : A(t)
Show that the economy converges to a balanced growth path, and find the growth rates of
Y and K on the growth path. (Hint: Show that we can write Y /(A L) as a function of
K/(A L), where = /(1 ). Then analyze the dynamics of K/(A L)).
(b) Now consider embodied technological progress. Specifically, let the production function
be Y (t) = J(t) L(t)1 , where J(t) is the effective capital stock. The dynamics of J(t)
= sA(t)Y (t) J(t). The presence of A(t) term in this expression
are given by J(t)
means that the productivity of investment at t depends on technology at t.
Show that the economy converges to a balanced growth path. What are the growth rates
= J(t)/A(t). Then use the
of Y and J on the balanced growth path? (Hint: Let J(t)

same approach as in (a), focusing on J(t)/(A L) instead of K(t)/(A L).

2. Assume a production function that takes a Cobb-Douglas form in capital K, labor L, and
land C:
Y = A(t)K(t) L(t) C(t)

where A(t)/A(t)
= g, L(t)/L(t)
= n and > 0, > 0, > 0 and + + = 1. The
amount of land, C, is fixed. Saving rate s > 0 is exogenously given. Capital depreciates at rate
. Define K/Y , the capital-output ratio.
(a) Write down the growth rates of capital stock and output as a function of .
(b) Using the results from (a), write down the growth rate of the capital-output ratio as a function of .
(c) Define steady state as a situation where is constant, compute the steady state value of .
(d) Compute the steady-state growth rate of output. Is it positive?
1

(e) Compute the steady-state growth rate of output per-capita. Is it positive?

3. Consider the Cass-Koopmans-Ramsey model with Cobb-Douglas production, y(t) = k(t) ,
and the utility function takes form u(c) = c1 /(1 ), where = .
(a) What is k on the balanced growth path (k )?
(b) what is c on the balanced growth path (c )?
(c) Let z(t) denote the capital-output ratio, k(t)/y(t), and x(t) denote the consumption-capital
and x(t)/x(t)

ratio, c(t)/k(t). Find expressions for z(t)

in terms of z, x, and the parameters of the model.
(d) Tentatively conjecture that x is constant along the saddle path. Given this conjecture:
(i) Find the path of z given its initial value, z(0).
(ii) Find the path of y given the initial value of k, k(0).
4. In this problem, we introduce government spending into the Ramsey model. Now physical
capital accumulation equation becomes:
= F (K(t), 1) C(t) G(t) K(t)
K(t)
where G(t) denotes government spending.
(a) Suppose households utility function takes form as:
Z
c(t)1
U=
et
1
t=0
What are the effects of a permanent increase in G(t) on the path of consumption, physical
capital and balanced growth rate?
(b) Now suppose government spending and private consumption are perfect substitutes. Specially, Suppose households utility function takes form as:
Z
(C(t) + G(t))1
U=
et
1
t=0
What are the effects of a permanent increase in G(t) on the path of consumption, physical
capital and balanced growth rate?