Jeffrey Parker, Reed College
Fall Semester, 2011
Work the following problems from Barro and Sala-i-Martin:
In addition, answer the following essay questions using appropriate examples from the text and homework:
- We have talked a lot in class about "scale effects." What exactly do we mean by scale effects? How would you tell from the solution of a growth model whether or not scale effects are present? For one of the models with scale effects that we have studied, explain intuitively (not mathematically) why these effects arise. Is the intuition empirically reasonable?
- Suppose that the economy of Reedia is in a steady-state equilibrium described by the Lucas-Uzawa model of Chapter 5. Suddenly, due to the retirement of some aging and ineffective teachers, Reedia's educational system suddenly becomes more efficient. Without doing extensive mathematical analysis, describe as completely as possible the answers to the following:
- What will happen to the steady-state values of the growth rate and the optimal share of human capital allocated to the physical-goods sector? Why?
- During the transition to the new steady state, how will the growth rate compare to the growth rate in the old steady state and the growth rate in the new steady state?