Week 1 – Workshop questions

GDP (in millions of dollars)	Stock of physical capital (units)
Efficiency units of labor
100	15,000	16,000
150	15,000	20,000
180	15,000	24,000
200	15,000	28,000
210	15,000	32,000

a. Comment on the rate of change in GDP as the economy uses more efficiency units of labor.

b. How would the aggregate production function of this economy look if GDP is measured along the vertical axis and efficiency units of labor on the horizontal axis?

c. What explains the shape of this aggregate production function?

Links : http://www.worldbank.org/depweb/english/beyond/global/chapter15.html

http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD

http://www.worldbank.org/depweb/english/beyond/global/chapter2.html

3. The old Soviet Union devoted enormous resources exclusively to increasing its physical capital stock, and yet eventually the increase in the country’s GDP came to an end.Based on the discussion in the chapter, explain why this was inevitable.

4. 
   Go to the Web site of the Penn World Table (https://pwt.sas.upenn.edu/), which provides data for sources of economic growth over time. The data shows that the real GDP (at constant 2005 national prices) in China is higher than that in India in 2010 and 2011. How do the variables given below explain the real GDP differences between China and India?
   

	Real GDP at constant 2005 national prices (in billion. 2005US$)		Capital stock at constant 2005 national prices (in billion. 2005US$)		Index of human capital per person, based on years of schooling		TFP at constant national prices (2005=1)
	China	India	China	India	China	India	China	India
2010	11,504	4,180	39,662	9,408	2.6	1.9	1.2	1.1
2011	12,563	4,467	44,643	10,299	2.6	1.9	1.2	1.1

Source: Data from Penn World Table; Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania (Nov 2012).

4. 
   Suppose the level of total efficiency units of labor is fixed. Plot the aggregate production function with physical capital stock (K) on the horizontal axis. Identify any two points as the initial amount of physical capital stock and the corresponding output.
   An earthquake destroys a certain amount of physical capital stock. Show what happens to K and the output in your graph.
   

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