Impact of Technology on GDP Growth Paper

Impact of Technology on GDP Growth Paper

Instructions/Descriptions

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Introduction

In this Module we constructed our first macroeconomic model based on microeconomic foundations! This one-period, representative agent model is a simplified representation of how the economy works as we thread households labor-leisure decisions to firms’ production decisions and to the government’s spending (mindful of its balance, such that taxes are always enough to fund spending, that is, there are no deficits or surpluses. The model provides a common framework in which the goods market is tied to the labor market pinning down wages, employment and the production and allocation of goods in the economy (i.e. the economy’s equilibrium).

But something that we used and introduced since the last Module is technology as part of the production function Y=zF(N,K). That ‘z’ is something special.

Enter the Solow residual. As discussed in the Module, we (think) we know what technology is, but it is not as obvious and measurable as workers and machines are. It was Robert Solow (Nobel Prize recipient) who realized that if you can count output, labor, and capital, you can “back out” technology!

Instructions

The purpose of this exercise is to document the parallel in output growth and technological progress.

Get the following series from the St. Louis Federal Reserve Bank FRED database from January 1954 to December 2017:

– Real Gross Domestic Product (GDPC1)

We are going to do the following transformations to our quarterly GDP series, which is in billions of (real) 2012 dollars to make it comparable to Solow’s technology series which is an annual index set equal to 1 in the year 2011; go to EDIT GRAPH and:

+ Units (dropdown): Index (Scale value to 100 for chosen date) set to 2011-01-01.

+ Modify frequency (dropdown): set to Annual.

+ Customize data (dropdown): Set Formula: a/100 and click on Apply. This transform the Index from 100 to 1, which is the base value of the Solow residual set to the year 2011 as you will see.

Next, create a separate graph for:

– Total Factor Productivity (RTFPNAUSA632NRUG)

Your work has to have:

– Introduction (what is the question that you are addressing, for example, what is the importance of technological advances in GDP growth? —25 points)

– Narrative (a description of how you are addressing it —50 points)

– Conclusion (what do you learn from the exercise and also ties together the two parts above —25 points)

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