In 1961 the British economist Nicholas Kaldor (1908 -1986) studied economic grow
ID: 1165603 • Letter: I
Question
In 1961 the British economist Nicholas Kaldor (1908 -1986) studied economic growth in many countries over long periods of time and isolated several stylized facts about economic growth which remain valid to this day.
(a) Briefly explain five Kaldor’s stylized facts for economic growth. (10)
(b) Define the concept of a golden rule. Draw graph and explain why golden rule achieved at k ' ( to establish this result, image that you start to the left of k' and explain why moving to the right increase consumption. Similarly show that consumption decrease when moving rightwards fromapositiontotherightofk' . (10)
(c) Draw graphs showing the evolution of Y/L in the catch-up phase and then in the ensuing steady state when the economy starts from a capital labor ratio below its steady-state level. (10)
Question 2
(a) What types of policies are available to a government that wants to promote economic growth? For each type of policy you identify, explain briefly how the policy is supposed to work and list its costs or disadvantages. (10)
(b) What is convergence? Explain the difference between unconditional convergence and conditional convergence. (8).
(c) What two explanations of productivity growth does endogenous growth theory offer?. How does the model differ from the production function in the Solow model? (12)
Explanation / Answer
Answer a - There are six facts about economic growth, which is given by Nicholas kaldor. He explained these aa " a stylised view of the facts". The statiscal properties of long - term economic growth are - 1) the shares of national income which is earn by labour and capital are constant over a long periods of time .
2) The rate of growth of the capital stock is also constant over a long period of time.
3) The growth of output per worker is constant over a long periods of time .
4) The capital output ratio is constant over a long period of time .
5) The rate of return on investment is also constant over a long period of time.
6) The real wage grows over a long period of time.
Kaldor's model is the introduction of the technical progress function in place of the usual production function. The technical progress function relates technical progress to growth of productivity and capital accumulation, while the usual production function relates output per head to capital per head.
Cost
Answer 2 (a)- The two policies the government can employ to promote economic growth are Monetary and Fiscal policy. Monetary policy: it is relates to the interest rate and affecting the supply of money . Fiscal policy : it is relates to the governmental decision making with respect to taxation, government spending, governmental borrowing and the management of the government debt. Monetary policies can be the most common tool for the influencing the economic growth. By lowering interest rates it reduces the cost of borrowing and encourages investing, as well as , encouraging consumer spending . With lower interest rate ,it can also reduce the. Consumer to save and potentially having the consumer spend more. When the interest rates are lowered on mortgage payments , the disposable income of consumer increased. Another policy which can promote economic growth would be fiscal policy. This policy can boost the demand of cutting taxes and increase government spending . If the government decrease income taxes, then there would be an increase in disposable income, which make consumer spend more . If the government spending was higher, it will create more jobs and essentially increase the economic growth.Costs of the policy are - If the unemployment situation is there in the economy , changes in taxation and particularly government spending may have a significant impact on the level of the national inch through the increase in aggregate demand that they cause . Fiscal policy therefore very effective in reducing demand- deficient unemployment. Disadvantage- Inflexibility- changes in direct taxes may take considerable time to implement and government spending is often inflexible in a downward direction. Conflict between objectives- fiscal policy designed to achieve one goal may adversely impact on another. Monetary policy -costs- the main instrument of monetary policy at present is the rate of interest. The rate of interest may be changed at short notice and regular intervals and may have a significant impact on short term economic activity. Disadvantage- Time lags - it may take considerable time for monetary policy measures to influence aggregate demand. Answer 2 ( c). - Convergence is the hypothesis that poorer economies per capita incomes will tend to grow at faster rates than richer economies.