UNIT 1: THE CAPITALIST REVOLUTION

PRINCIPLES OF ECONOMICS

Practical Session N°14

José Elías Durán Roa

A. Solution to Problem Set 12

B. Conceptual Questions Problem List 12 [Discussion]

OUTLINE

Solution to Problems

Problem List 13

Problem n°1

Refer to Figure 16.12 to answer the following questions:

Using the same axes, draw the indifference curves of a citizen or policymaker who cares only about wage growth.

a

According to the data in the figure, which countries would be the high performers and which would be the low performers?

b

Best: Finland, Sweden, France;

Worst: US, Canada, Spain.

Problem n°1

Problem n°1

Using the same axes, draw your indifference curves if you only cared about the unemployment rate. Which countries would be the high and low performers in this case?

Indifference curves are vertical lines, with higher utility closer to the origin. Stars: Japan, Norway, Sweden; Laggards: Spain, Italy, Belgium.

c

Now considering your preferences over other economic factors, which country in the figure would you choose to live in, and why? Explain which economic factors you included in your decision.

d

Problem n°1

The answer depends on the student’s preferences and factors chosen. For example, students may be willing to live in a country with generous unemployment benefits, strong labour unions, or policies that support retraining, even if that country has slightly lower wage growth or higher unemployment than other countries.

What was the basis of US technological leadership:

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• after the second world war
• from the mid-1990s (you may find sections 21.1 and 21.2 useful if you choose this option)

Use the models you have learnt in the course (including readings suggested in the ebook and your own research) and in particular, make use of at least three of the following concepts, explaining their meaning, to justify your answer:

• production function; shift of and shift along
• labour-saving technology
• innovation rents
• research and development, education
• competition
• new entry.

Select one concept that is important to your explanation but is not in this list. You may refer to evidence and models presented in other units in The Economy. Be sure to provide appropriate referencing.

Problem n°2

There are many different options here. With either (a) or (b), they should discuss the US adopting labour-saving technology (the introduction of capital-intensive modes of production in the pre-World War II period really took off after the war and started showing up in the data; in the 1990s, the spread of the ICT revolution into the workplace is probably the dominant factor).

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This rotates the production function upwards (given a certain amount of inputs, you can produce more with the new technology), but it will also probably lead to a movement along the function as more inputs are used (refer back to the chart in Figure 16.3 showing the trajectory of the US, which highlights the relatively constant capital output ratio, highlighting the importance of technological progress).

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New technology doesn’t fall like manna from heaven, investment in R&D and education have made these advances possible (students might want to show some numbers on this e.g. firm spending on R&D in the US or number of patents). Part of the push to introduce labour-saving innovations has come from competition driving prices lower and reducing profit margins (think about globalization leading rich countries to lower costs by investing in capital-intensive techniques; refer back to the isocost analysis in U2 for the simplest model of this). Also note that first copy costs like R&D spending are not consistent with a competitive market structure, some monopoly rents are required otherwise no one would invest in R&D (some may use material from U21).

Other Problems N°2

Other Problems N°1

Consider a diagram with capital intensity on the horizontal axis and labour productivity on the vertical axis. Which of the following statements is/are true?

1. Technological progress can be represented by an upward rotation of the production function.
2. If the production function is concave, the capital to output ratio declines as capital intensity rises.
3. In a stationary state as described by John Stuart Mill, growth in GDP per worker ceases because the production function shifts down.

1. Technological progress means that at a given capital labour ratio, the level of output per worker is higher.
2. The slope of a line from the origin to a point on the production function is the output/capital ratio; the output capital ratio declines (the slope falls) as capital intensity rises for a concave production function.
3. No, because of diminishing marginal productivity of capital.

b

c

a

Other Problems N°2

The diagram plots GDP per worker vs. capital per worker, both across countries in 1990 (the right panel) and the trajectories since 1760 for a few representative countries (the left panel). Based on this information, which of the following statements is correct?

1. There is no clear evidence of technological progress in GDP per worker in the US.
2. Taiwan was more capital intensive than the UK in 1990.
3. The average product of capital has been higher in Japan than in the UK over the years shown.
4. Japan has been the most successful country in attaining a high GDP per worker by use of its capital.

a

b

c

d

The figure shows a plot of unemployment rate vs. gross unemployment benefit replacement rate, averaged over the period 2001 to 2011. Based on this information, which of the following statements is correct?

• Eastern Asian countries achieved low unemployment rates despite having high unemployment benefits.
• Data from Nordic countries suggests that high unemployment benefits lead to high unemployment rates.
• The graph confirms the prediction of the labour market model that higher unemployment benefits would raise the wage-setting curve, leading to higher unemployment.
• Countries that offer generous unemployment insurance schemes can still achieve low rates of unemployment.

Other Problems N°2

c

a

b

d

1. Japan and Korea achieved low unemployment rates whilst also having low unemployment benefits.
2. For Norway, Denmark, Sweden, and Finland, there is a negative correlation between unemployment benefits and the unemployment rate.
3. The positive correlation between the level of unemployment benefit and the unemployment rate is not evident in the graph.
4. There is a wide range of unemployment levels among countries with high unemployment benefits, for example, the Netherlands vs. France.