In this problem we are going to reconstruct Japan's experience after world was II using the Solow model. Download the Maddison Project Database (the data is also uploaded on blackboard). For this problem assume s = 0:1, = 0:07, n = 0:01 and g = 0:02. Also the production function in terms of efficient unit of worker is y = zk1=3, where z is the TFP.
(a) Find real GDP per capita for the United States and Japan from 1900 to 2010. Divide Japan's GDP per capita by the US GDP per capital and plot the result it in Excel. Assume Japan was in steady state between 1900 and 1944. Find the average GPD per capita relative to the US and use it as measure of prewar steady state output for Japan.
(b) Now find TFP parameter, z, such that steady state value of output in the model matches the prewar steady state output for Japan (hint: find steady state capital per efficient unit of worker in terms of z. Then plug it in the production function and find a z such that output is equal to 0.3).
(c) Predict Japan's economy until 2010 as if nothing has happened. What do you notice?