Global Macroeconomics Assignment 1 - Charan Ailawadi

Global Macroeconomics -Assignment 1 – Short Answer questions
1. Draw the diagram in class depicting the capital labor ratio (K/L) on the horizontal
axis and labor productivity (Y/L) on the vertical axis. Illustrate on your diagram the
short-term effect of a fall in the labor force, such as that now experienced in China.
Does this lead to a fall in labor productivity showing Thomas Malthus was wrong?
 Short-term labor productivity gains may result from a decline in the labor force.
 This is due to the fact that in order to maintain the same level of productivity as
before, the surviving employees would need to work harder and more effectively.
 Short-term increases in the capital-labor ratio would result from a decline in the labor
force. This is because there is now more capital accessible for every worker as a result
of the decline in the workforce.
 As a result, the capital-labor ratio—a measure of the quantity of capital accessible per
worker—would rise.
 Overall, Malthus thought that while a labor shortage would have short-term negative
impacts on the economy, these effects would eventually be mitigated by market
forces.
2. Using an appropriate equation from class explain how the reform of the Hukou
System boosted Chinese economic growth prior to 2012.
 An economic model that describes the link between inputs (labor and capital)
and output (production) is called the Cobb Douglas Production Function. It is
frequently applied to productivity and economic growth analysis.
 The following is an expression for the production function:
A * K^α * L^(1-α) = Y where labor is represented by L, capital by K, output by
Y, total factor productivity by A, and the percentage of capital in the
production function by α.
 With the help of the Hukou System reform in China, migrant workers were
able to legally work in cities and receive better social welfare benefits.
 This resulted in a decrease in rural poverty and an increase in the urban
workforce. The labor force (L) in urban areas rose as a result of the Hukou
System reform, as seen by the Cobb Douglas Production Function.
 Because there were more workers available to produce products and
services, the labor force increased.
 Moreover, because the additional workers brought new ideas and skills to
the workplace, the labor force growth increased total factor productivity (A).
 Since the labor force and total factor productivity are both significant
components of the Cobb Douglas Production Function, it is possible to view
the Hukou System reform as a factor that supported China's economic growth
before 2012.
3. Using our theoretical framework from class (and the appropriate diagram) explain
how R&D investment in AI is expected to improve long-term Chinese economic
growth.
 The Solow Swan model, which examines productivity increases mostly fueled by
technology advancement, can be used to explain long-term economic growth.
Research and development expenditures in artificial intelligence (AI) can raise total
factor productivity (TPF) by enhancing the efficacy and efficiency of diverse sectors
and industries.
 We can assume that there is an exogenous improvement in knowledge or technology
that results in more productive manufacturing techniques in order to boost TPF. At
any given level of labor and capital, this increase in A would cause the production
function to shift upward and result in higher output levels.
 Output per labor would consequently rise as well. This is so that more output may be
produced using the same amount of labor input thanks to the increase in TPF. As a
result, there would be a rise in the marginal product of labor (MPL), which would
raise wages and production per worker.
 Artificial Intelligence has the potential to boost productivity and output by automating
repetitive operations, decreasing errors, and enhancing decision-making.In the end,
this may result in a greater TPF, which gauges an economy's general efficiency.
Long-term, sustained economic growth in China may also result from increased
investment in AI.
 It can foster innovation, establish new industries, and boost competitiveness in the
global market by increasing productivity and output.
 As a result, there may be a rise in exports, the creation of jobs, and income levels, all
of which can support long-term economic growth.
As seen from the diagram below – more R&D investment in AI can improve the
TPF thereby improving the economic growth in the long run

Global Macroeconomics Assignment 1 - Charan Ailawadi

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Global Macroeconomics -Assignment 1 – Short Answer questions

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