3
$\begingroup$

I have this assignment which asks the following:

"Compute the average capital-to-output ratio in Australia from 1960 to 2022. Explain how to compute the average ratio. (Hint: use the nominal GDP and the nominal gross fixed capital formation - New private business investment)

We have been given a capital income share constant of 0.3 and capital depreciation rate constant of 0.04.

I was originally going to calculate it using K/Y = (s / (g + δ)) , However, the hint of using the GFCF has thrown my thought train off. Is this the wrong formula?

The marking scheme also references the knowledge of the Steady State?

Any ideas to help put me back on track would help greatly.

Improve this question
$\endgroup$

1 Answer 1

Reset to default
2
$\begingroup$

Dividing GFCF by GDP is a standard way to approximate $K/Y$. Also, if I am not mistaken, K/Y = (s / (g + δ)) only holds in steady state when $K/Y$ is constant. In real life economies are typically not exactly always at their steady state. Maybe that is why the assignment mentions steady state. You also don't mention text of the assignment but maybe it is asking if K/Y is near the steady state or something like that? In that case you need to calculate both left and right hand side.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.