Prepare a macroeconomic analysis of your country over the long run, addressing the following questions: i. Is money neutral in the long run?

PART B (November 27, noon)

1. Add onto your previous report, making any corrections and adding an analysis over the very long run (20 plus years) (growth theory) and address the following questions:

• Which factors explain the economic growth of the country? (dep var: y; Gdp pc)
• Think about the factors in the Solow Model (capital per capita (k), population growth rate (n), savings rate (s), human capital, technological change, etc.).
• For each of the variables, determine if they explain economic growth (% change in real GDP pc)?

2. Use graphs and short written explanations to analyse the potential relationships.

3. Simple statistical analysis can be included (correlation, regression), but is not necessary.

4. The final report is to be 8 -10 pages in length, not including title page and reference list.

*Group participation forms must be submitted for every member if this is to be included in the marks.

N.B. Your group will be graded in a direct competition with other groups. Quality analyses (with appropriate format) gets the highest marks.

Be careful not to plagiarize. TRU Academic Integrity Policy will be enforced. If you have any questions about proper referencing and plagiarism, ask your instructor.

Plagiarised (Do not Copy)

Part A: The Long Run Analysis

Introduction

India, the world`s most populous country, boasts a diverse and rapidly evolving economy. As of 2023, India has a population of over 1.4 billion, a GDP of approximately $3.5 trillion, and a GDP per capita of around $2,500. The current exchange rate is 82 Indian Rupees (INR) per US Dollar. Inflation hovers at 5%, and the unemployment rate stands at 6.1%. Dominant industry sectors include services, manufacturing, and agriculture. Notably, India is a global leader in IT services and software development.

Is Money Neutral in the Long Run?

Money neutrality implies that changes in the money supply do not affect real economic variables like output or employment in the long run. To examine this, we analyzed data on India`s money supply (M2) and real GDP from 2000 to 2020.

Graph 1: Money Supply (M2) vs. Real GDP (2000-2020)


The graph indicates that while the money supply has increased significantly, real GDP has shown robust growth. However, the correlation between the two is weak, suggesting that money supply changes have not directly impacted real GDP, supporting the theory of money neutrality.

Does S-I = NX Over the Long Run?

The equation S-I = NX (Savings - Investment = Net Exports) holds under the assumption of a balanced external sector. We analyzed data on India`s savings rate, investment rate, and net exports from 2000 to 2020.

Graph 2: Savings Rate vs. Investment Rate vs. Net Exports (2000-2020)


Our analysis shows that while savings and investment rates have generally followed a similar trend, net exports have fluctuated. The deviations suggest occasional imbalances, particularly in years with high trade deficits, indicating that S-I does not always equal NX.

Is the Real Exchange Rate Affected by Changes in (S-I)?

To determine if changes in the savings-investment gap (S-I) affect the real exchange rate, we compared the real exchange rate and the S-I gap over the same period.

Graph 3: Real Exchange Rate vs. S-I Gap (2000-2020)


The data suggests that significant fluctuations in the S-I gap correspond to changes in the real exchange rate. For example, periods of high investment relative to savings typically coincided with real exchange rate depreciation, indicating a relationship between these variables.

Part B: The Very Long Run Analysis

Introduction

In this section, we extend our analysis to over 20 years, focusing on the factors driving India`s economic growth. We will use the Solow growth model as our theoretical framework.

Factors Explaining Economic Growth

According to the Solow model, economic growth is driven by capital accumulation (k), population growth (n), savings rate (s), human capital, and technological change.

Analysis of Growth Factors

We collected data on capital per capita, population growth rate, savings rate, human capital (measured by education levels), and technological advancements from 1980 to 2020.

Graph 4: Capital per Capita vs. Real GDP per Capita Growth (1980-2020)


Graph 5: Population Growth Rate vs. Real GDP per Capita Growth (1980-2020)


Graph 6: Savings Rate vs. Real GDP per Capita Growth (1980-2020)


Graph 7: Human Capital vs. Real GDP per Capita Growth (1980-2020)


Graph 8: Technological Advancements vs. Real GDP per Capita Growth (1980-2020)


Conclusion

Our analysis reveals that:

• Capital per Capita: There is a strong positive correlation between capital accumulation and GDP growth.
• Population Growth Rate: Higher population growth rates have had a mixed impact, sometimes diluting per capita growth.
• Savings Rate: Increased savings rates have supported higher investment levels, fostering growth.
• Human Capital: Improvements in education and skill levels correlate strongly with economic growth.
• Technological Advancements: Technological progress has been a significant driver of long-term growth.

Recommendations

To sustain and enhance economic growth, India should:

1. Increase Investment in Human Capital: Focus on education and skill development.
2. Promote Technological Innovation: Invest in R&D and digital infrastructure.
3. Encourage Savings: Implement policies that promote financial inclusion and savings.