Question

Imagine the following goal of Lenin/Stalin at the beginning of the Soviet regime in Russia: to overtake (i.e. equal) and surpass the world’s industrialized economies in terms of GDP per capita. To achieve this goal, the main instrument of control is the fraction of national production that is devoted to building the nation’s productive capacity: new machin es, factories, transportation equipment, and roads . That is, the main instrument to achieve this goal is the fraction of GDP devote d to investment. The rest of national production is used for consumption, i.e. to produce consumer items like clothing and food. The country begins with relatively little capital, being mostly rural and non - industrialized. Assume each of the following:  GDP per capita starts in USSR at $300/year.  The world’s industrialized economies start with GDP per capita of $5000/year.  Po pulation growth rates are 2% everywhere in the world.  All capital depreciates at 8% per year. a. At what average annual rate will income per capita in the USSR have to grow in order to overtake (i.e. to equal) the industrialized nations’ income per capita in exactly 30 years? Assume the industrialized nations’ income per capita is growing at 2% per year. b. If the USSR sustains the growth rate of part a., how long after it has overtaken the industrialized nations’ GDP per capita will it take for it to atta in double the industrialized nations’ GDP per capita? Again, assume the industrialized nations’ GDP per capita is growing at 2% per year. For parts c. - e., use the Harrod - Domar model , and assume that 1 ruble of capital produces 0.5 rubles of output (i . e. A =0.5). Also, assume inputs are used more efficiently in the industrialized countries, so that A=0.6 there. c. What fraction of national output mu st the USSR devote to building new capital goods in order to attain the growth rate of part a.? What fraction would be left for consumer items? [Hint: another word for the fraction of output devoted to building new capital goods is the investment rate, i.e. the ratio I t /Y t . And, remember that savings equals investment , so the investment rate equals the savings rate . ] d. A t what rate are the industrialized countries saving if they are growing at 2% per year? e. What would you calculate the ratio of consumption per capita in the USSR to consumption per capita in the industrialized countries when the USSR overtakes the industrialized countries (i.e. when GDP per capita is equal)? Assume the savings rates of parts c. & d. What would the ratio be when the USSR reaches double the industrialized nations’ GDP per capita?

Answer 1