WRITTEN PRELIMINARY Ph.D EXAMINATION Department of Applied Economics June. - 2011 Trade, Development and Growth For students electing Macro (8702/Prof. Smith) & Macro (8701/Prof. Roe) option Instructions Identify yourself by your code letter, not your name, on each question Start each question s answer at the top of a new page You are requested to answer a total of FOUR questions Answer ONE question from Set One Answer THREE questions from Set Two You have four hours to complete this examination 1
SET ONE: Required Question; Answer ONE Question (I or II but not both) I. Trade policies What are the effects of liberalizing trade policies (such as tariffs, quotas, voluntary export restraints, bans, and export subsidies)? In your answer to this question, be sure to consider: 1. Modeling assumptions and implications of relaxing assumptions 2. Theoretical and empirical analyses 3. National, sub-national, and global perspectives II. Growth accounting Let Y n (t) = G (p 1 (t), p 2 (t), K (t), A (t) L (t)) denote a country s nominal GDP function where Y n (t) is nominal GDP, (p 1 (t), p 2 (t)) are prices of final good Y 1 and Y 2 respectively. 1. What are the "typical" assumptions/restrictions imposed on this function that correspond to competitive economy? 2. Consider the following PPF at two different points in time, where point A is Y n (t = 0), and B is Y n (t > 0). Calculate/derive Solow s residual with the maintained hypothesis that the data are generated by an economy whose nominal value of final good production can be characterized by the nominal GDP function G (p 1 (t), p 2 (t), K (t), A (t) L (t)) 2
Y 1 Y n (t) = G[p 1 (t),p 2 (t),k(t),a(t)l(t)] B = Y n (t>0) A = Y n (t=0) Y 2 2. Explain your results in 1 above as a movement from point A to point B. Discuss and distinguish between the "real" component of adjustment and the nominal component of adjustment. 3. The typical growth accounting exercise presumes an economy-wide production function Y (t) = F (K (t), A (t) L (t)) where Y (t) is real GDP. (a) Compare the results you would obtain presuming a production function as the basis for your growth accounting exercise with the results obtained from presuming a GDP function. (b) Explain/discuss the advantage of basing your analysis on the GDP function for the empirical analysis. 4. If the economy is in long-run balanced growth-path equilibrium, the rate of growth of L is constant at rate n, and the rate of Harrod neutral technological change is also constant at rate x, what is the contribution of the growth in K, technological change A, and labor force L to the long-run growth in real GDP? 3
SET TWO: Answer THREE of the following four questions (III to VI) III. Analyze the effects of cross-country differences in policies. Answer for three of the policies below. Be sure to consider at least two effects for each of the three policies. 1. Intellectual property rights 2. Investment policies 3. Environmental policies 4. Labor policies 5. Growth and development policies 6. Administrative, technical, and regulatory policies IV. Theory: The household optimization problem Fundamental to modern growth theory is the concept of a representative - "Ramsey household". The household s felicity function is expressed as q (t) = u ([q a (t) γ], q m (t), q s (t)) (1) where q a, q m,and q s denote the quantities of food, manufactures and a service good consumed per household member, respectively, and γ > 0. We omit the t notation to reduce clutter. The service good is not traded internationally so that its price is endogenous, while the prices of q a and q m are unchanging (presumably world prices). The household is presumed to maximize the discounted present value of utility subject to a budget constraint. Utility is q 1 θ 1 U = 0 1 θ e(n ρ)t dt (2) 4
where n denotes the annual net growth in household members, ρ is the time rate of discount, and θ is the inverse of the intertemporal elasticity of substitution. The budget constraint is k = w + k (r n) + πh ɛ (3) where expenditure at each instant in time is: (p m = 1 = numeraire) { } ɛ = E (1, p a, p s ) q+γp a p j q j : q u([q a γ], q m, q s ), (q a, q m, q s ) R 3 ++ min q a,q m,q s j=a,m,s and w, r,and π = π ( p a, w, r k) β (t) denote rental payments to labor, capital k and land H, respectively. Here, r k = r + δ (δ =depreciation), and β (t) is exogenous technological change augmenting land H. For purposes here, you may assume a specific functional form for the felicity function (1). Otherwise, let the function be increasing and strictly concave in its arguments (q a, q m, q s ), and everywhere, continuous and twice differentiable. 1. What is the "standard" interpretation of the γ parameter in (1)? 2. How is the γ parameter likely to affect behavior over time as capital deepening occurs? 3. Derive the Euler equation. 4. Provide an intuitive interpretation of this equation s depiction of consumer behavior over time. In particular, discuss the effects of θ, ρ and ṗ s /p s on the household s incentives to forego and to smooth consumption over time. 5. A common feature of the primitives associated with production of the goods a, m, s is exogenous technological change that augments labor at a constant Harrod rate, x. Show how this feature changes the Euler condition derived in 3. above. 6. If a steady state exists, how does γ affect, if at all, the long-run level of r? 5
7. Show how an exogenous technological change that augments labor at a constant Harrod rate, x "alters" the budget constraint (3). (note, you need to replace ɛ in (3) with E (1, p a, p s ) q + γp a ) 8. Speculate as to how your answer in 7. above is likely to affect the models equations of motion (i.e., the differential equations that are needed to solve numerically for the economy s transition path to longrun equilibrium) V. Trade policies and welfare Assume that optimal trade policies seek to maximize global welfare. Use your knowledge of theoretical and empirical analyses to evaluate: 1. Arguments for free trade 2. Arguments for protectionism 3. Institutional arrangements for trade policy VI. Analysis: economic growth and poverty While the literature clearly shows that poverty alleviation is strongly associated with economic growth, effort has been made to pursue "pro-poor" growth strategies (See Chapter 3 in Nallari and Griffi th (2011) Understanding Growth and Poverty, IBRD). One of the many dimensions of this strategy is to increase the productivity of labor intensive sectors of the economy, which for many countries is agriculture where a majority of a country s poor typically reside. For purposes here, this question focuses on a very stylistic and rather narrow aspect of this strategy. A "snap-shot" of an economy depicted in the accompanying social accounting matrix provides essential insights into its basic economic structure. The first panel of the data give the base solution results using the basic "platform" three sector growth model. The second panel shows the results from an increase in the base year of ten percent in scale parameter of the agricultural production function. The third panel is just the simulated values of panel two divided by the corresponding values in panel one (the base solution). 6
1. Discuss/explain the fundamental economic forces of underlying the transitional dynamics of the base solution. In your answer, give particular attention to agriculture, and some attention to wage income since the poor typically have relatively little access to capital but they may have rights to land. 2. Now, consider the simulation (second panel). Essentially, explain how the "fundamental" economic forces discussed in 1. are modified by a once and forever costless increase in agriculture s scale parameter. Give special attention to the "pro-poor" side of this issue. In answering these questions, be "analytical," using your knowledge of the theory to explain the results. 7
Production Activities Commodities 1x10 6 Ag Ind Sr Ag Ind Sr Labor Capital Land HouseH. Accum. Gov. Taxes Trade Sum Prod. Act Ag 14457 14456.9 Prod. Act In 31555 462.51965 32018 Prod. Act Sr 63322 63321.98 Comm. Ag 14919 14919.42 Comm. In 13484 18071 31555.48 Comm. Sr 46194 17128 63321.98 Labor 8488 16622 37262 62371.72 Capital 4591 15396 26060 46046.8 Land 1378 1378.364 Households 62372 46047 1378 109796.9 Accumulation 18071 18071.47 Government 17128 17128.31 Taxes 17128 17128.31 Trade 462.51965 462.5196 14456.9 32018 63321.98 14919.42 31555.48 63321.98 62371.717 46046.798 1378.3642 109796.9 18071.47 17128.31 17128.3 462.51965 Factor Shares of labor 0.5871 0.5191 0.5885 capital 0.3175 0.4809 0.4115 land 0.0953 Output Share in GDP 0.131669 0.2916112 0.5767193 Base Solution 1x10 6 Household Utility (t) Price of Wage per Total Wage Interest Total K K Stock r*k Asset Total Land Total GDP GDP per Savings Output Land Rent Labor Share Total K in Total K in Total K in Capital to Year Expenditure Home Good Worker per Income Rate paid Stock per Worker Income per Rents Saving (billions) Worker Rate Industrial Agricultural Service per Farm Industry Agriculture Service Industry Agriculture Service Output (billions) Year by Firms (billions) Worker (billions) (billions) per Year Sav/GDP (billions) (billions) (billions) Worker (billions) (billions) (billions) Ratio 1993 58691 23230 0.998 3638 61667 0.201 231960 13684 2066 1419 22298 109701 6472 0.203 41360 14884 53545 591 0.348 0.142 0.510 98966 23518 109476 2.11 1998 76621 29969 1.018 4304 78452 0.174 348909 19140 2375 1124 24361 140317 7697 0.174 59190 11791 68132 699 0.392 0.088 0.520 163490 21507 163912 2.49 2003 95178 36924 1.031 4884 95740 0.158 474756 24218 2609 991 25929 171617 8754 0.151 75515 10391 83119 793 0.409 0.064 0.527 230210 20919 223628 2.77 2008 114538 44179 1.041 5396 113757 0.147 607946 28837 2800 935 27343 204121 9682 0.134 91545 9807 98738 876 0.418 0.051 0.532 299254 21169 287523 2.98 2013 134930 51828 1.048 5856 132762 0.140 748289 33005 2966 924 28818 238345 10513 0.121 107918 9690 115222 951 0.422 0.043 0.535 371027 22000 355263 3.14 2018 156611 59972 1.053 6276 153023 0.135 896467 36769 3117 943 30495 274797 11271 0.111 125063 9886 132803 1019 0.424 0.038 0.538 446174 23290 427004 3.26 2023 179858 68719 1.057 6668 174821 0.131 1053730 40188 3261 984 32465 313991 11975 0.103 143316 10317 151723 1083 0.426 0.035 0.540 525508 24981 503241 3.36 2028 204970 78181 1.060 7038 198446 0.128 1221712 43328 3400 1044 34793 356456 12642 0.098 162977 10946 172232 1143 0.426 0.032 0.541 609971 27051 584690 3.43 production function scale parameter by 10 % 1993 61438 24216 1.005 3812 64621 0.191 231960 13684 1930 3420 21796 112360 6629 0.194 20913 35874 55290 619 0.168 0.326 0.506 52633 59622 119705 2.06 1998 78814 30751 1.022 4424 80637 0.169 345923 18976 2258 2847 23692 141946 7787 0.167 41135 29862 69440 718 0.265 0.217 0.518 117042 56108 172773 2.44 2003 96967 37561 1.034 4968 97402 0.155 468225 23884 2504 2576 25190 172474 8798 0.146 58503 27019 84114 807 0.312 0.163 0.525 181693 55411 231121 2.71 2008 116026 44708 1.043 5457 115043 0.145 597640 28348 2702 2469 26576 204364 9694 0.130 74744 25891 99498 886 0.337 0.132 0.531 247317 56572 293750 2.92 2013 136190 52277 1.049 5900 133769 0.139 734113 32380 2873 2462 28038 238074 10501 0.118 90773 25827 115800 958 0.352 0.113 0.534 314636 59115 360362 3.08 2018 157700 60362 1.054 6309 153818 0.134 878361 36026 3027 2527 29703 274076 11241 0.108 107157 26509 133237 1024 0.362 0.101 0.537 384435 62801 431125 3.20 2023 180821 69065 1.057 6692 175451 0.131 1031617 39345 3172 2648 31653 312862 11932 0.101 124306 27778 152042 1087 0.368 0.093 0.539 457573 67521 506523 3.30 2028 205844 78497 1.060 7056 198947 0.128 1195477 42398 3313 2818 33953 354942 12588 0.096 142552 29552 172458 1146 0.372 0.087 0.541 534980 73234 587262 3.37 Simulation divided by base solution 1993 1.047 1.042 1.007 1.048 1.048 0.951 1.000 1.000 0.934 2.410 0.977 1.024 1.024 0.954 0.506 2.410 1.033 1.048 0.483 2.300 0.992 0.532 2.535 1.093 0.976 1998 1.029 1.026 1.004 1.028 1.028 0.971 0.991 0.991 0.951 2.533 0.973 1.012 1.012 0.961 0.695 2.533 1.019 1.028 0.676 2.464 0.996 0.716 2.609 1.054 0.980 2003 1.019 1.017 1.002 1.017 1.017 0.982 0.986 0.986 0.960 2.600 0.972 1.005 1.005 0.967 0.775 2.600 1.012 1.017 0.762 2.556 0.997 0.789 2.649 1.034 0.981 2008 1.013 1.012 1.002 1.011 1.011 0.988 0.983 0.983 0.965 2.640 0.972 1.001 1.001 0.971 0.816 2.640 1.008 1.011 0.807 2.611 0.998 0.826 2.672 1.022 0.982 2013 1.009 1.009 1.001 1.008 1.008 0.992 0.981 0.981 0.969 2.665 0.973 0.999 0.999 0.974 0.841 2.665 1.005 1.008 0.835 2.645 0.999 0.848 2.687 1.014 0.982 2018 1.007 1.006 1.001 1.005 1.005 0.994 0.980 0.980 0.971 2.682 0.974 0.997 0.997 0.977 0.857 2.682 1.003 1.005 0.852 2.668 0.999 0.862 2.697 1.010 0.982 2023 1.005 1.005 1.001 1.004 1.004 0.996 0.979 0.979 0.973 2.692 0.975 0.996 0.996 0.979 0.867 2.692 1.002 1.004 0.864 2.683 0.999 0.871 2.703 1.007 0.983 2028 1.004 1.004 1.000 1.003 1.003 0.997 0.979 0.979 0.974 2.700 0.976 0.996 0.996 0.980 0.875 2.700 1.001 1.003 0.872 2.693 0.999 0.877 2.707 1.004 0.983