Question

For the SGM use a savings rate of 0.3, a depreciation rate of 0.1, n = 0.1 and g=0.05 and a starting capital labor ratio of 2. Assume A (total factor productivity) = 1.

Suppose there is an increase in federal income tax rates to pay off the debt. How would you model this change in the SGM and Yt = Ynt + Yct models?

Answer 1

For this case, we have a Structuralist Growth model which is in some way, similar to a Solow Growth model, where we can construct a system to model the behaviour of our system.

In this type of models, the investment (I) has a double role, as a component of the aggregate demand, and as a flow that increases capital.

We need to remember that

where K is capital, L is labour and G is government spending, and this is a production function with constant returns to scale

G=T, government spending is equal to taxes, and

Our law of capital movement is , when we turned into a per capital quantities we have,

The taxes enter in the way of this equivalence where is the per capita taxes

And with this equivalence we can model the effects of this variable over time. Any change in will be caused in part by the behavior of the taxes