1. Assume a closed economy, perfectly elastic labor supply, and linear technology. Suppose the capital-output ratio is 2, and the gross savings rate is 10%.
(a) Use the Harrod-Domar growth equation to determine the rate of growth.
(b) What would the gross savings rate have to be to achieve 10% growth?
(c) Assuming a perfectly elastic labor supply, state one criticism of this model.
2. Explain the meaning of the "Lewis turning point" in the Lewis Two-Sector Structural Change Model.
3. Explain in what sense coordination failure can lead to multiple equilibria in a given economy. Provide an economic example of coordination failure.
4. How can the O-ring theory help explain the existence of a low-level equilibrium that an economy may find itself in?
5. According to the HRV growth diagnostic framework why is there no "one size fits all" development policy?
Empirical Section
1. Download the excel file on the course website. The data set contains information on Net official development assistance and official aid received, Gross domestic savings (% of GDP), and GDP per capita (in PPP terms), for a set of 110 countries in 2013. This empirical sectionis related to the William Easterly exercise of testing the Harrod-Domar growth model predictions.1 According to the model, there is a positive link between foreign aid, investment level, and income per capita.
(a) Test the first of these links. That is, perform Easterly-like analysis to see whether there is a positive association between foreign aid and investment. Discuss.
(b) Is there any relationship between investment level and income per capita? To answer this question you need to perform the second test of the link. Discuss your results.
Attachment:- PS2data.xlsx