ECOS2025 Tutorial 5

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ECOS2025

Tutorial 5 (Week 5)

Questions are based on Week 4 lecture contents and are designed to deepen our conceptual understandings. Students are strongly advised to discuss these questions with their group members in their designated tutorial classes. Questions marked * are designed for student (or group) led discussion.

1. What are the similarities and differences in broad terms between the growth experience of Korea and that of Japan What are the similarities and differences

*2. Professor Lee showed in lecture that the World Bank identified in The Growth Report (2008) five common characteristics of the countries which showed at least 25 years of sustained growth performances.

a) List the Asian economies among them. In what ways do you think the common characteristics were important for sustained economic growth

b) Democracy was largely lacking in these economies. Discuss why authoritarian governments could be suited for leading a rapid growth for developing economies.

*3. Let’s calculate the contribution of capital, labour, and TFP to economic growth over the following periods: 1965 – 1980, 1980 – 1990, 1990 – 2000, and 2000 – 2019, respectively, for Korea. Growth in output over a period can be decomposed into the contribution of capital and labour inputs and the contribution of TFP (measured as a residual, also known as the Solow residual). This is called the growth accounting method covered in Introductory Macroeconomics. The formula and data are as follows. Note that X/X is the growth rate of X and α is a constant parameter capturing the output share of input.

Y/Y = A/A + α K/K + (1-α) L/L

Korean Data

GDP

Capital

Labour

1965

53034

212549.1

8145443

1980

207459

796452.9

13700000

1990

538683

2108021

18200000

2000

1071742

5225205

21400000

2019

2193132

11200000

26800000

(Data source: PWT,https://www.rug.nl/ggdc/productivity/pwt/ lang=en)

a) Assuming α = 0.3, fill in the following table. Which period had the highest contribution of TFP

Period

Output

growth

Y/Y

(%)

Contribution of capital and labour

α K/K + (1-α) L/L (share of output growth)

Contribution of TFP growth

( A/A)

(share of output growth)

1965 – 1980

1980 – 1990

1990 – 2000

2000 – 2019

b) Assuming α = 0.4, repeat the above. Do you see any major difference

Period

Output

growth

Y/Y

(%)

Contribution of capital and labour

α K/K + (1-α) L/L (share of output growth)

Contribution of TFP growth

( A/A)

(share of output growth)

1965 – 1980

291.18

1980 – 1990

159.66

1990 – 2000

98.96

2000 – 2019

104.63

Now, consider the following decomposition shown in the table below, taken from Perkins (2013), Ch 2, p.58, originally from Eichengreen et al’s study (2012).

c) Is there a significant difference from your estimates of TFP obtained for a) and b) above What explains such a large difference in the TFP estimates What would be the limitations of the method of growth accounting

d) What factors would determine the TFP growth in a country

*4. The table shows the shares of savings, investment, and average annual output growth rates for Korea, Brazil, and Malaysia over 1980 – 1991.

Now answer the following questions.

a) What does the ICOR (incremental capital output ratio) in the bottom row measure

b) Korea and Malaysia had roughly the same investment rates of 34% over the period. Other things equal, what would explain the observation that output growth in Korea was significantly higher than that in Malaysia

5. Readhttps://documents1.worldbank.org/curated/en/965511468194956837/pdf/104230-BRI- Policy-1.pdf. What is the ‘Middle Income Trap’ List 5 countries in East Asia

currently in the middle-income group.

6. Explain what you understand by macroeconomic stability. Why is macroeconomic stability important for long-run economic growth