Advanced Macroeconomics Analysis

Project ECON 7040

Instructions

Form groups of 3 or 4 students. The due date is May 28, 2018 at 4:00 PM.

Part A: Income Accounting (5 marks)

In this section, you are asked to repeat the analysis in Hall and Jones (1999). As seen in Lecture 5, the production function in country i is

Yi = K–i (AiHi)1≠–,

where Yi is output, Ki is capital, and Hi represents human capital. The importance of capital in production is –. Hall and Jones assume that – = 1/3 for all countries. They also assume that human capital is

Hi = e„(Ei)Li, (1)

where Ei is years of schooling in country i, Li is labor, and „(Ei) is a piecewise linear function. In particular, „(·) implies that in the first 4 years of school, each year yields a return of 13.4%. In the next four years, each year yields a return of 10.1%, while beyond the 8th year of schooling each year returns 6.8%. The production function can be rearrange as

Ai = yi

hi

3 Ki

Yi

4 – –≠1

,

where yi and hi are per-worker output and human capital, respectively. Taking logs we have

lnAi = lnyi ≠ lnhi ≠ –

1≠– ln 3

Ki

Yi

4 . (2)

1. The excel file “DATA_HALL_JONES_1999_QJE.xls” contains the original data in Hall and Jones (1999). For each country, we have output per-worker (yi), capital to GDP ratio (Ki/Yi), and years of schooling Ei. Your first job is to obtain, for each country, a measure of lnhi. You will need to use equation (1) and the assumptions about „(·). Plot a graph with lnyi in the vertical axis and lnhi in the horizontal axis. What can you say about the relationship between human capital per-worker and output per-worker?

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2. Now, use equation (2) to obtain a measure of countries’ productivity levels lnAi. Ex- plain the meaning of this measure. Does Ai vary too much across-countries? In par- ticular, what is the mean and the standard deviation of Ai?

3. Plot a graph with lnyi in the horizontal axis and lnAi in the vertical axis. Is the relationship between yi and Ai weaker or stronger than the relationship between yi and hi? Report both correlations.

4. Pick two developing countries (call them country B and C) and compare them to Australia (call it country A). In particular, what are the ratios yB/yA and yC/yA. Then what are the ratios of all the other components (Ai, KiYi , and hi). What is the main source of income di�erences between countries B and C and Australia?

Part B: Update and Be Creative (5 marks)

In this section, you are challenged to collect more data and to find new interesting facts about the relationship between income per-worker and country characteristics. Be creative, pick 3 or 4 country characteristics, di�erent from the ones studied so far (for example, rule of law, financial openness, trade openness, or production complexity) and see how they relate to yi. Explore di�erent data sources: World Bank data (https://data.worldbank.org/), IMF data (http://www.imf.org/en/Data), OECD (http://stats.oecd.org/), Macrohistory data (http://www.macrohistory.net/data/) or production complexity data (https:// atlas.media.mit.edu/en/). By collecting new data you will probably lose some countries. Just make sure your sample is not too small to make statistical inference. Provide graphical representation for your findings and statistical correlations.

1. First of all, you need to update the data on yi. The previous section used income per- worker in year 1988. Collect data on real GDP (PPP adjusted: rgdpo) and employ- ment (emp) from the Penn World Tables (https://www.rug.nl/ggdc/productivity/ pwt/).

2. Test for conditional convergence by comparing the ratio between yi in 2014 and 1988 (vertical axis) against the level of income per-worker in 1988 (horizontal axis). Recall that we should compare alike countries. Group OECD countries and (initially) poor countries separately. Do you observe conditional convergence? what is the correlation between these two variables (y2014i /y1988i vs. y1988i )?

3. Now study the relationship between yi in 2014 and other country characteristics during the 80’ or 90’s. This is, did countries with better institutions or a more complex set exported products in the 90’ reach higher level of income in 2014? Provide economic intuition for your results. If necessary, cite relevant papers.

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Part C: Argue with Macroeconomics (5 marks)

In this section, you will write an essay to argue against or in support of the macroeconomic models we have studied so far. Remember that the next section of the course will cover business cycles and recessions. Therefore, restrict your analysis to long-term outcomes: this is, economic growth and development. Use your own intuition but also help yourself with journal or blog articles. The essay should not have more than 4 pages long. Graphs and tables (if necessary, can be added in as an appendix).