# Eco 435 Growth and Development of the Chinese Economy

## Growth Accounting Assignment:

In this assignment you will do an exercise of growth accounting and to study the impact of investment rate on long-run growth. In the attached excel file, I provide the data on real GDP, real capital stock, total employment, average level of human capital and real investment rate in China for the period 1991-2013.

### Some Guidelines:

- In all you calculations, assume that the labor income share is 1/2.
- Always express growth rate as annual average growth rate, and calculate growth rate of a variable x(t) as ln[x(t+1)]-ln[x(t)]
- You need to submit a summary report and the excel spreadsheet that you used for generating the results.
- The report should be no more than three pages, one-sided, double space.

- Do a conventional growth accounting by decomposing China’s real GDP growth between 1991 and 2013 into the contributions from capital accumulation, employment growth, increase in average human capital level and TFP growth. According to this decomposition, which is the main source of China’s GDP growth during this period?
- As we discussed in the class, the capital accumulation is endogenous and depends on the growth of the other three variables. Do a theory-based growth accounting that decompose the GDP growth into the growth in capital-output ratio, growth in employment, growth in average human capital level and growth in TFP. According to this alternative decomposition, which is the main source of China’s growth? Explain why the conclusion from this decomposition is different from the standard decomposition in I.
- As I provided in the excel file, China’s real investment rate has increased from 15% in 1991 to 32% in 2013. Many people have argued that this increase in the investment rate is a main driving force of China’s growth during this period. To see if this is true, do the following counterfactual simulation using the Solow model.
- Assume that the total employment, average level of human capital and the TFP remain the same as in the data for the entire period, and that the initial capital stock and the real GDP in 1991 are also the same as in the data. However, assume that the investment rate is kept at 15% for the entire period so that the capital stock and GDP in the years after 1991 are determined recursively by the following two equations: Kt+1 = (1 − δ)Kt + 0.15Yt Yt+1 = At+1K0.5 t+1 (ht+1Lt+1) 0.5 where δ = 0.07 is the depreciation rate and t = 1991, …, 2012. How much will the capital stock growth rate be reduced as a result of lower investment rates? What about the GDP growth rate? Based on your calculation, what do you think is the contribution to growth of the increases in the real investment rate?

- III. Now redo the counterfactual by assuming te investment rates are the same as in the data, but the TFP level stays at the 1991 level, i.e., no TFP growth. So the capital stock and GDP in the years after 1991 are determined recursively by the following two equations: Kt+1 = (1 − δ)Kt + StYt Yt+1 = A1991K0.5 t+1 (ht+1Lt+1) 0.5 where δ = 0.07 is the depreciation rate, St the investment rate in year t, and t = 1991, …, 2012. How much will the capital stock growth rate be reduced as a result of no TFP growth? What about the GDP growth rate? Based on your calculation, what do you think is the contribution to growth of the TFP growth?
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