An economy has the following Cobb-Douglas production function: F(K,L) = K^1/6 (EL)^5/6. The depreciation rate is 1% and the saving rate is 48%. The economy is in a steady state, where the population decreases at a rate 1%, while real GDP per capita grows at a rate 1.5%.
(a) Find the GROWTH RATE of the following variables:
(i) the elective labor force, EL
(ii) the ratio of labor to capital, L=K
(iii) the labor income, wL
(iv) the capital income rK
(b) Use growth accounting to calculate what portion of output growth is due to:
(i) an increase in capital
(ii) an increase in labor
(iii) an increase in total factor productivity
(c) If total capital K is 64 million THIS year, nd real GDP NEXT year.
(d) By how many percentage points should the government change the saving rate so that the economy may converge to the Golden rule steady state (use a "+" for an increase and a"-" for a decrease)? How would the current generation feel about the change?