-
From: Mash-Erdene Ganbold (1154248)
Problem Set 6
1. Understanding Chinas economic growth is important for us
because the development of Chinas
economy from a relatively low growth economy1 to a major
economic force in the world showing
substantial growth rates is apt to be studied.
2. Capital accumulation was the major source of economic growth
in pre 1978 era (1952-1978) as
opposed to total productivity as the main source of growth in
post 1978 era.
The Solow model says the quantity of output per worker converges
to a steady state y*=Af(k*),
when the savings rate s, labor force growth rate n, and total
factor productivity A are held constant.
In the pre 1978 era, China experienced a relatively modest
economic growth which may be put in
context with the above prediction of the Solow model2.
Also the Solow model tells us that the output increases
consistently (thus per capita income of a
country) only if the total factor productivity continually
increases.
This prediction may be applied to the post 1978 development of
Chinas economy which was
characterized by continuous growths in total factor
productivity.
3. Agricultural sector in Chinas economy was heavily labor
intensive by 1978 and pre 1978 era
where nearly 70 percent of the labor force was employed. Within
the structural change in the econ-
omy from 1978 on, total factor productivity growth helped to
supply the population with food with
less labor input and the labor force that was freed up in the
process could be moved to manufactur-
ing and other industry. Also this reallocation of labor force
has the effect of positively adding to the
aggregate productivity growth because the nonagricultural sector
has a higher average labour
productivity than in agricultural sector3.
4. The production function seen in lecture session is given by:
Y = A KN
1-.
Whereas the production function as per the article is: Y = A KHh
NL1-.
The latter differs from the former by multiplication of the
argument N with factor h denoting the
average level of human capital.
5. Let: Y = A KHh NL1- and FHK, NL =KHh NL1-
Y = A KHh NL1-
= A FHK, h NLlogHYL = log HAL + log @FHK, h NLDDY
Y=
DA
A+
FKHK,hNLFHK,hNL DK +
FNHK,hNLFHK,hNL DN +
FNHK,hNLFHK,hNL Dh
DY
Y=
DA
A+
AFKHK,hNLKAFHK,hNL
DK
K+
AFNHK,hNLNAFHK,hNL
DN
N+
AFhHK,hNLhAFHK,hNL
Dh
h
where
A FK HK, h NL K = rA FN HK, h NL N = wA Fh HK, h NL h = s
DY
Y=
DA
A+
r K
YDK
K+
w N
YDN
N+
sh
Y
Dh
h
DY
Y=
DA
A+
DK
K+ H1 - L DN
N+ H1 - L Dh
h
1
H1-LDY
Y=
1
1-
DA
A+
DK
K+
DN
N+
Dh
h
6. In the pre 1978 era, the resource allocation was implemented
as per government plan (i.e. state
sector dominated economic activity).4 In that era, the Chinese
government undertook policies to
induce industrialization by making substantial investments in
heavy industries which derived from
restricting private consumption and setting low prices for
agricultural goods.
In the post 1978 era, the government of China gradually opened
up economic activities to reforms,
slowly conceding authority to private economic activities. The
reforms started off first in the agricul-
tural sector where the newly formed household-responsibility
system incentivized the sale of
agricultural products beyond quota at market prices which led to
notable productivity growths in the
agricultural sector. Then the reforms were passed on to
lower-level governments which helped the
liberalization of small-scale township and village enterprises
of which management was tied to
productivity incentives.5 Henceforth the economic reforms of
China has evolved to further liberiliza-
tion of trade as well as nonstate (and private) enterprises and
the increase of employment share of
nonstate sector to ca. 60 percent. Therefore the way the
resources are allocated gradually shifted to
resource allocation by the market (especially in 1998-2007:
reallocation through the process of
entry and exit) in the post 1978 era.
7. The major difference in the manufactoring sector in 1998-2007
to other eras lies in the introduc-
tion of private enterprises and reforms to state owned firms
such that they were allowed to go
bankrupt.
Furthermore, in this era, a significant number of the labour
force is employed in manufactoring
sector as opposed to agricultural sector in the earlier eras6.
Also the manufactoring sector regis-
tered sizeable total factor productivity growths making up 2
percentage points of the aggregate total
factor productivity annually.
-
From: Mash-Erdene Ganbold (1154248)
Problem Set 6
1. Understanding Chinas economic growth is important for us
because the development of Chinas
economy from a relatively low growth economy1 to a major
economic force in the world showing
substantial growth rates is apt to be studied.
2. Capital accumulation was the major source of economic growth
in pre 1978 era (1952-1978) as
opposed to total productivity as the main source of growth in
post 1978 era.
The Solow model says the quantity of output per worker converges
to a steady state y*=Af(k*),
when the savings rate s, labor force growth rate n, and total
factor productivity A are held constant.
In the pre 1978 era, China experienced a relatively modest
economic growth which may be put in
context with the above prediction of the Solow model2.
Also the Solow model tells us that the output increases
consistently (thus per capita income of a
country) only if the total factor productivity continually
increases.
This prediction may be applied to the post 1978 development of
Chinas economy which was
characterized by continuous growths in total factor
productivity.
3. Agricultural sector in Chinas economy was heavily labor
intensive by 1978 and pre 1978 era
where nearly 70 percent of the labor force was employed. Within
the structural change in the econ-
omy from 1978 on, total factor productivity growth helped to
supply the population with food with
less labor input and the labor force that was freed up in the
process could be moved to manufactur-
ing and other industry. Also this reallocation of labor force
has the effect of positively adding to the
aggregate productivity growth because the nonagricultural sector
has a higher average labour
productivity than in agricultural sector3.
4. The production function seen in lecture session is given by:
Y = A KN
1-.
Whereas the production function as per the article is: Y = A KHh
NL1-.
The latter differs from the former by multiplication of the
argument N with factor h denoting the
average level of human capital.
5. Let: Y = A KHh NL1- and FHK, NL =KHh NL1-
Y = A KHh NL1-
= A FHK, h NLlogHYL = log HAL + log @FHK, h NLDDY
Y=
DA
A+
FKHK,hNLFHK,hNL DK +
FNHK,hNLFHK,hNL DN +
FNHK,hNLFHK,hNL Dh
DY
Y=
DA
A+
AFKHK,hNLKAFHK,hNL
DK
K+
AFNHK,hNLNAFHK,hNL
DN
N+
AFhHK,hNLhAFHK,hNL
Dh
h
where
A FK HK, h NL K = rA FN HK, h NL N = wA Fh HK, h NL h = s
DY
Y=
DA
A+
r K
YDK
K+
w N
YDN
N+
sh
Y
Dh
h
DY
Y=
DA
A+
DK
K+ H1 - L DN
N+ H1 - L Dh
h
1
H1-LDY
Y=
1
1-
DA
A+
DK
K+
DN
N+
Dh
h
6. In the pre 1978 era, the resource allocation was implemented
as per government plan (i.e. state
sector dominated economic activity).4 In that era, the Chinese
government undertook policies to
induce industrialization by making substantial investments in
heavy industries which derived from
restricting private consumption and setting low prices for
agricultural goods.
In the post 1978 era, the government of China gradually opened
up economic activities to reforms,
slowly conceding authority to private economic activities. The
reforms started off first in the agricul-
tural sector where the newly formed household-responsibility
system incentivized the sale of
agricultural products beyond quota at market prices which led to
notable productivity growths in the
agricultural sector. Then the reforms were passed on to
lower-level governments which helped the
liberalization of small-scale township and village enterprises
of which management was tied to
productivity incentives.5 Henceforth the economic reforms of
China has evolved to further liberiliza-
tion of trade as well as nonstate (and private) enterprises and
the increase of employment share of
nonstate sector to ca. 60 percent. Therefore the way the
resources are allocated gradually shifted to
resource allocation by the market (especially in 1998-2007:
reallocation through the process of
entry and exit) in the post 1978 era.
7. The major difference in the manufactoring sector in 1998-2007
to other eras lies in the introduc-
tion of private enterprises and reforms to state owned firms
such that they were allowed to go
bankrupt.
Furthermore, in this era, a significant number of the labour
force is employed in manufactoring
sector as opposed to agricultural sector in the earlier eras6.
Also the manufactoring sector regis-
tered sizeable total factor productivity growths making up 2
percentage points of the aggregate total
factor productivity annually.
1
1 P106: "Prior to 1978, the average growth rate of real per
capita GDP was a modest 3 percent a year..."
2 P110: "...the increases in physical and human capital, both of
which were at very low levels in 1952."
2 Problem Set 6 (hand-in).nb
-
3 P114: "... reallocation of workers from agriculture
contributes positively to aggregate productivity"
4 P114: "...resource allocation was centrally determined by
government plan rather than by the market..."
5 P115: "...managerial responsibility system that linked
managers and workers' income to financial outcomes of the
enterprises."
6 P117: "By 2007, domestic private enterprises alone accounted
for 51% of total urban employment in the manufacturing
sector"
Problem Set 6 (hand-in).nb 3