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ECON7560 Globalisation and Economic Development

Final Take-home Assignment

Semester I, 2023

Instruction

Complete all questions in this assignment.

To complete this take-home assignment, you could refer to the course materials that we have posted on Blackboard. However, you must complete this assignment independently without discussing with your classmates or any other person.

The assignment will be due 50 hours after its release, i.e., at 2 PM on June 8, 2023 (Brisbane time). You could submit your assignment via the portal in the Assessment section of Blackboard.

You could either type your answers in a document or scan your handwritten an-swers for submission. I would encourage you to type your answers as much as you could since it would be clearer and minimize the chance that you miss out on marks because the grader can not understand your handwriting. For example, you could type some answers in Part B in a Microsoft Word document or Google Doc doc-ument. For other questions that involve some mathematical symbols or tables for which you are not profificient in typing, you could paste the scanned photos that capture your hand-writen answer. I would recommend that you submit a single document in PDF format.

The assignment is open book, which in our case means that students can access all resources on Blackboard during the exam. You should complete this assignment individually and independently. Communication among students is forbidden. Vi-olations of academic integrity will be scrutinized, investigated, and disciplined. For more information, please refer to https://ppl.app.uq.edu.au/content/3.60.01-student-code-conduct

There is NO deferred option for this assessment. Students must apply for an ex-tension before the due date and time if applicable circumstances apply.

1. Consider there are 100 people in a society. Each person may decide to study com-puter programming or not. Suppose the share of people who study computer pro-gramming is λ. The earnings for those who did not study computer programming is 2+5λ. The earnings for those study computer programming is 3+5λ for λ < 0.4; and 3 + 8λ for λ ≥ 0.4. Each person decides whether or not to study computer programming at the same time. The fifinancial cost of studying computer program-ming is C. Citizens are risk-neutral so that their utility equals earning minus any education costs.

(a) Suppose C = 2, is there an equilibrium where no person studys computer programming? Show your reasoning. (5 marks)

(b) Suppose C = 3, is there an equilibrium where 90 people study computer programming while others do not? Show your reasoning. (5 marks)

(c) Suppose C = 5, is there an equilibrium where all people study computer programming? Show your reasoning. (5 marks)

(d) Suppose C = 5, and the government considers the following policy to en-courage the accumulation of human capital. N persons who chose to study computer programming will each receive a full scholarship that covers their cost of studying computer programming. The N persons would be randomly chosen. If no more than N persons decided to study computer programming, every person who study computer programming gets the scholarship. For this policy to enable an equilibrium where every person studys computer program-ming, what is the minimum value of N? (5 marks)

2. Suppose in a Country Gatsbyland, there are two socio-economic classes. The work-ing class accounts for 90% of the population. Each person in the working class has a wealth of w, where w > 0. The rest of the society consists of people with inherited wealth. Each person in this class has a wealth of 9w. What is the Gini coefficient of the wealth distribution in this country? (10 marks)

3. In the Solow model that we discussed during the lecture, the production function is:

Yt = AtKt ↵Lt 1−↵,

for t = 0, 1, 2, ··· . Suppose we have the following parameter values:

n = 0.01

δ = 0.1

A0 = 5

k0 = 10

For all t ≥ 0, the exogenous technological progress follows the following dynamics:

At+1 = At.

Suppose the last 4 digits of your student ID at UQ is i, the saving rate s for you in this question is determined as following:

(1) divide i by 23 and get the remainder j;

(2) add 10 to j to get z;

(3) divide z by 50 to get s.

In other words, the saving rate s for your calculation is the remainder of the last 4 digits of your student ID divided by 23, plus 10 and then divided by 50. Mathe-matically,

s =

mod(i, 23) + 10

50

where mod() represents modulo operation. For example, if your student ID is 20231234, then since 1234/23 ⇡ 53.652, the remainder of the division is 1234−53 ⇤ 23 = 15. The saving rate for your calculation is s = (15 + 10)/50 = 0.5. If there are leading zeros in the last 4 digits of your student ID, ignore them. So if the last 4 digits in your student ID is 0604, i = 604.

Similarly, the ↵ is the production function for your calculation is:

↵ =

mod(m, 13) + 10

50

where m is the mark that you got in the midterm exam of this course. Therefore, if you got 73 in the midterm, the ↵ in your calculation should be:

↵ =

mod(m, 13) + 10

50

= 0.36

because

(1) divide 73 by 13 has a remainder of 8 because 8 + 13 ⇥ 5 = 73;

(2) add 10 to 8 to get 18;

(3) divide 18 by 50 to get ↵ = 0.36.

Answer the following questions.

(a) What is the steady state growth rate of total output Yt? (10 marks)

(b) Write down your student ID, then write down the s and ↵ that apply to you in this question. What is the output per capita in period t = 10? Round your answer to 2 decimal points. (10 marks)

(c) What is the steady state capital-output ratio k/y? Show your calculation of this ratio in the steady state. Round your answer to 2 decimal points. (5 marks)

(d) Suppose people’s wellbeing depends only on the level of their consumption. Imagine that a government could make a policy that decrease the parameter s by 0.01 while keeping every other parameters unchanged. Would the policy make people better o↵, unchanged, or worse o↵ in stead state? Why? Show your reasoning. (5 marks)

(e) Suppose a government considers a policy to lower the saving rate. What potential policies may the government consider? What are the challenges or drawbacks of these policies? List two policies that may help to lower the saving rate and brieflfly explain why? (5 marks)

4. There are two economies. Economy A is dominated by the self-driving cars, which has the following production function: The production function of the self-driving car industry is:

Y = K

1

2 (min{2H, 7L})

1

2 ,

where K represents capital, H represents high-skilled labor, and L represents low-skilled labor.

Economy B is dominated by the agriculture industry, which has the following pro-duction function:

Y = K

1

3 (4H + 3L)

2

3 ,

where as before K represents capital, H represents high-skilled labor, and L repre-sents low-skilled labor.

Suppose an immigration policy in each economy increased the intake of low-skilled immigrants rapidly. In the short run, how would it a↵ect the wage of high-skilled workers in each economy? (10 marks)

5. Campante & Yanagizawa-Drott (2017) study the impact of international long-distance flights on the global spatial. Based on your understanding of this study, answer the following questions.

(a) Describe the empirical method was used by Campante & Yanagizawa-Drott to identify causal e↵ects international long-distance flights. (5 marks)

(b) Consider the following city pairs: Singapore-Stockholm, Zurich-Hong Kong, Brisbane-Mumbai. According to Campante & Yanagizawa-Drott (2017), which city-pair is least likely to have a direct flight early on? Why? Based on the information that you gather to answer this question, could you conclude which cities mentioned above have the slowest economic growth between 1980 and 2010? Explain your reasoning and information that you use to reach your conclusion. (5 marks. Hint: computational engine Wolfram Alpha may be helpful: https://www.wolframalpha.com/)

6. Read the Bloomberg article titled “America’s Inequality Problem Just Improved for the First Time in a Generation” in the folder on Inequality. Based on the in-formation provided in this article, evaluate the following statement: “The ratio of 50-10 percentiles of full-time workers earning in Colombia is greater than 1.5 in the year 2020.” Is the statement correct or incorrect? Why? If you do not think there is sufficient information from the article to evaluate the statement, you could also state so and provide an explanation. (10 marks. For full credit for this question, you need to explain your reasoning. A simple yes or no without an explanation will receive no marks for this question.)

7. Dani Rodrik argued that an undervalued local currency might be beneficial to economic growth in developing countries with weak economic institutions such as ine↵ective contractual and property rights enforcement. He argued that sectors that produce tradable goods are particularly susceptible to a weak institutional en-vironment, and an undervalued local currency could be helpful in mitigating those problems. What policy may achieve an undervalued currency? Why may such a policy work? Why may such a policy not work? What are the potential costs and drawbacks of such a development policy? What are the challenges in implementing such a policy? Explain your reasoning and arguments briefly. Answers should be concise. Do not write more than 400 words. Using bullet points to list arguments for each question is recommended. (5 marks)