From: Mash-Erdene Ganbold (1154248)

Problem Set 6
1. Understanding Chinas economic growth is important for us because the development of Chinas
economy from a relatively low growth economy1 to a major economic force in the world showing
substantial growth rates is apt to be studied.
2. Capital accumulation was the major source of economic growth in pre 1978 era (1952-1978) as
opposed to total productivity as the main source of growth in post 1978 era.
The Solow model says the quantity of output per worker converges to a steady state y*=Af(k*),
when the savings rate s, labor force growth rate n, and total factor productivity A are held constant.
In the pre 1978 era, China experienced a relatively modest economic growth which may be put in
context with the above prediction of the Solow model2 .
Also the Solow model tells us that the output increases consistently (thus per capita income of a
country) only if the total factor productivity continually increases.
This prediction may be applied to the post 1978 development of Chinas economy which was
characterized by continuous growths in total factor productivity.
3. Agricultural sector in Chinas economy was heavily labor intensive by 1978 and pre 1978 era
where nearly 70 percent of the labor force was employed. Within the structural change in the economy from 1978 on, total factor productivity growth helped to supply the population with food with
less labor input and the labor force that was freed up in the process could be moved to manufacturing and other industry. Also this reallocation of labor force has the effect of positively adding to the
aggregate productivity growth because the nonagricultural sector has a higher average labour
productivity than in agricultural sector3 .
4. The production function seen in lecture session is given by: Y = AK N1- .
Whereas the production function as per the article is: Y = AK HhNL1- .

The latter differs from the former by multiplication of the argument N with factor h denoting the
average level of human capital.
5. Let: Y = AK HhNL1- and FHK, NL = K HhNL1-
Y = AK HhNL1-
= AFHK, hNL
logHYL = log HAL + log @FHK, hNLD
DY
Y

DA
A

DY
Y

DA
A

where

DY
Y
DY
Y

DY
Y

DA
A
DA
A

FK HK,hNL
FHK,hNL

DK +

AFK HK,hNLK
AFHK,hNL

DK
K

FN HK,hNL
FHK,hNL

DN +

AFN HK,hNLN
AFHK,hNL

FN HK,hNL
FHK,hNL
DN
N

Dh

AFh HK,hNLh Dh

AFHK,hNL
h

AFK HK, hNLK = r

AFN HK, hNLN = w
AFh HK, hNLh = s
+

r K
Y

1 DA
1- A

DK
wN DN
sh Dh
+

+
K
Y
N
Y h
DK
DN
Dh
+ H1 - L
+ H1 - L
K
N
h

DK
K

DN
N

Dh
h

1
H1-L

The latter differs from the former by multiplication of the argument N with factor h denoting the
average level of human capital.
2

Problem Set 6 (hand-in).nb

5. Let: Y = AK HhNL1- and FHK, NL = K HhNL1-

Y = AK HhNL1-
= AFHK, hNL
logHYL = log HAL + log @FHK, hNLD
DY
Y

DA
A

DY
Y

DA
A

where

DY
Y
DY
Y

DY
Y

DA
A
DA
A

FK HK,hNL
FHK,hNL

DK +

AFK HK,hNLK
AFHK,hNL

DK
K

FN HK,hNL
FHK,hNL

DN +

AFN HK,hNLN
AFHK,hNL

FN HK,hNL
FHK,hNL
DN
N

Dh

AFh HK,hNLh Dh

AFHK,hNL
h

AFK HK, hNLK = r

AFN HK, hNLN = w
AFh HK, hNLh = s
+

r K
Y

1 DA
1- A

DK
wN DN
sh Dh
+

+
K
Y
N
Y h
DK
DN
Dh
+ H1 - L
+ H1 - L
K
N
h

DK
K

DN
N

Dh
h

1
H1-L

6. In the pre 1978 era, the resource allocation was implemented as per government plan (i.e. state
sector dominated economic activity).4 In that era, the Chinese government undertook policies to
induce industrialization by making substantial investments in heavy industries which derived from
restricting private consumption and setting low prices for agricultural goods.
In the post 1978 era, the government of China gradually opened up economic activities to reforms,
slowly conceding authority to private economic activities. The reforms started off first in the agricultural sector where the newly formed household-responsibility system incentivized the sale of
agricultural products beyond quota at market prices which led to notable productivity growths in the
agricultural sector. Then the reforms were passed on to lower-level governments which helped the
liberalization of small-scale township and village enterprises of which management was tied to
productivity incentives.5 Henceforth the economic reforms of China has evolved to further liberilization of trade as well as nonstate (and private) enterprises and the increase of employment share of
nonstate sector to ca. 60 percent. Therefore the way the resources are allocated gradually shifted to
resource allocation by the market (especially in 1998-2007: reallocation through the process of
entry and exit) in the post 1978 era.
7. The major difference in the manufactoring sector in 1998-2007 to other eras lies in the introduction of private enterprises and reforms to state owned firms such that they were allowed to go
bankrupt.
Furthermore, in this era, a significant number of the labour force is employed in manufactoring
sector as opposed to agricultural sector in the earlier eras6 . Also the manufactoring sector registered sizeable total factor productivity growths making up 2 percentage points of the aggregate total
factor productivity annually.
1
1

P106: "Prior to 1978, the average growth rate of real per capita GDP was a modest 3 percent a year..."

P110: "...the increases in physical and human capital, both of which were at very low levels in 1952."

Problem Set 6 (hand-in).nb

P114: "... reallocation of workers from agriculture contributes positively to aggregate productivity"

P114: "...resource allocation was centrally determined by government plan rather than by the market..."

P115: "...managerial responsibility system that linked managers and workers' income to financial outcomes of the

enterprises."
6
sector"

P117: "By 2007, domestic private enterprises alone accounted for 51% of total urban employment in the manufacturing