Economics Homework Help

Solow Model Excel Assignment

Goals of the Assignment

There are two main goals for this assignment. First, it is meant to help improve your

understanding of the mechanics of the Solow growth model that we covered in the first

half of the class and to make sure you don’t forget about it before the final. Second,

since many jobs for economics majors require at least a basic knowledge of Microsoft

Excel, it is also meant to give you some practice with some of Excel’s basic features. If

you do not have access to Excel, Google sheets will also work as a free alternative.

The Assignment

For this assignment, we will be simulating a Solow Growth Model in an Excel

spreadsheet. To do this, please try follow these steps.

1. Set up the parameters of the model: In a box on your excel sheet, set input the

following numbers as values for each parameter. We will use numbers on your

student ID to give each of you a unique setup (if any number is a 0, skip it and

move to the next number). We will assume a Cobb-Douglas production function

a) Set capital’s share of income where X is the first number on your

student ID

b) Set the saving rate where X is the second number of your student ID

c) Set the depreciation rate where X is the third number of your student

ID

d) Set the population growth rate where X is the fourth number of your

student ID

e) Set the technology growth rate where X is the fifth number of your

student ID. Calculate using your values for and .

2. Calculate steady state capital per effective worker, output per effective worker, and

consumption per effective worker by hand.

3. Set the initial level of technology and . Set equal to half its

steady state value that you calculated in 2. Put these three values in the first row of

three separate columns in your spreadsheet.

4. Using Excel formulas (i.e. not calculating by hand), calculate , , , , ,

, and putting each in the first row of their own column in your spreadsheet

(you should now have 11 columns filled in total). You should be able to calculate all

of these variables using , , , and parameters.

5. Using the growth rates you set in part 1, use an Excel formula to calculate and

for 100 periods (so you should have 100 rows filled in with these values)

6. Using the law of motion for capital per effective worker, calculate for 100 periods

7. Calculate values for the other 8 variables for 100 periods (carrying formulas down).

8. From the 100 values you have generated, create graphs of

a) Capital per effective worker (include a dashed line at the steady state level of

capital that you calculated in 2)

b) The natural log of capital per worker

c) The natural log of aggregate capital

d) The growth rate of capital per worker and aggregate capital (you can use the

difference in the logs as an approximation for the growth rate)

9. Copy the spreadsheet you have created into a new sheet. After period 100, change

the saving rate to the value that optimizes steady state consumption (if you are

already at this value, choose an arbitrary new value between 0 and 1). Using the

new saving rate, starting in period 100, calculate values for all of your variables for

100 more periods (so you will now have 200 total values for each variable). Create a

graph for the following variables (for these graphs, start from period 50, so you will

plot t=50 to t=200). For each graph, include a dashed line at both the original and

new steady state values (calculate these by hand)

a) Capital per effective worker

b) Output per effective worker

c) Consumption per effective worker

10. Copy the original spreadsheet again onto a third sheet. Now double . Using the

new growth rate, starting in period 100 calculate values for all of your variables

forward to period 200. Create graphs (again starting in period 50) for

a) Output per effective worker (include dashed lines at both the original and new

steady states))

b) The natural log of output per worker

c) The natural log of aggregate output

d) The growth rate of output per worker and aggregate output (again using the

difference in logs)

11. You should now have 13 graphs. Put these together into a single document (Word,

google docs, powerpoint slides, anything works as long as the final format can be a

pdf), including a brief description (a few sentences) explaining what is happening in

each of the three parts (i.e. a few sentences each for step 8, step 9, and step 10).

Requirements/Tips/Grading

1. Your graphs should include labeled axes and a title. If you have multiple lines on the

graph (for graphs where you plot a steady state), include a legend making it clear

what each line represents.

2. You must make at least some changes to the default Excel (or whatever program

you use) style (e.g. change the color, font, sizes of the lines, gridlines, etc.). This is

just to practice making Excel graphs. Don’t go overboard with the changes – make

sure everything still looks clean.

3. Make sure your final document with graphs and descriptions looks professional and

readable. If it is hard for the grader to figure out what you are trying to show you

won’t get as high a score