4-5 - Growth

Question 1

The convergence triangle

Answer 1

A scatterplot, buildning a triangle, when graphing growth on the y-axis and GDPpc on the x-axis. The lower GDP the more spread out is the dots, then with higher income the countries converge towards zero growth.

Question 2

Proximate determinants of growth

Answer 2

• Factor accumulation: physical, human cap and population/labor.
• Natural resources use
• Productivity growth in technology and efficiecny gains

Question 3

Fundamental determinants of growth

Answer 3

The things that explains growth deeper, how the proximate causes can increase:

• Institutions
• Government
• Geography
• Openness
• Inequality
• History
• Culture

Question 4

General production function and how is growth generated?

Answer 4

Y = F(A,K, L)
Growth is the change in Y and is generated from changes in:
- L, which is the change in population.
- K, which depends on new investments and depreciation rate.
- A, which is gains in TFP. Neoclassical models keep it exo but endo explains it.

Question 5

Harrod-Domar model’s five assumptions:

Answer 5

1. Closed economy: I=sY
2. No substitution possibilities among inputs, always in fixed proportions.
3. Capital is the limiting factor in growth, labor is unlimited supply.
4. Constant returns to scale for each factor.
5. Leontief fixed-proportions tech (as a result of 2 and 4). Extra deltaK increase Y with a fixed change.

Question 6

ICOR

Answer 6

The incremental capital output ratio. Comes with the last fifth assumption in Harrod Domar, that k=deltaK/deltaY. Always a fixed rate of change that is equal to k. To increase K with an amount, we need to increase Y by something. (Bit confusing)

Question 7

The reduced model form for change in Y (Harrod Domar):

Answer 7

deltaY = s/k - deprec.

And for per capita we also subtract n.

Question 8

Policy implications of Harrod Domar?

Answer 8

• Increase savings rate s
• Decrease ICOR (k) which is equal to improving tech
• Lower population growth

Question 9

The big push

Answer 9

Aid as an alternative to domestic savings, pushes the country to increase investments and reach higher growth rate.

Question 10

Solow model in general form:

Answer 10

Y = Af(K,L)

Now A is multiplicative t the model and therefore have a bigger effect.

Question 11

Solow assumptions:

Answer 11

• Diminishing returns to each factor of production
• Substitution possibilities between factors
• Constant returns to scale of the factors
• Full employment so that L grows as fast as n.

Question 12

What is A in the model?

Answer 12

TFP that is a potential source of growth, and is often due to improvements in tech. Tech as a public good available to everyone

Question 13

Solow’s steady state

Answer 13

As Solow predicts convergence, the model says that when sy = (deprec + n)k, we have reached the steady state level. Here the capital per worker is constant and we cannot longer grow from capital accumulation (factor deepening).
Countries only grow up til this point –> convergence.

Question 14

The speed of convergence:

Answer 14

It’s a negative function as the closer you get to the steady state level, you approach in a slower pace. The returns of investments become smaller, and at ss it is zero.

Question 15

Conditional convergence:

Answer 15

Empirically, we don’t see universal convergence. Some converge, some diverge. Instead cond. convergence proposes that countries might have different ss, so need to change ss to grow further.

Question 16

Long-run growth according to Solow:

Answer 16

Relies on displacement of the steady state. There is a limit to how much savings rate can be increased and population growth reduced. So the target is the TFP. (Solow says this is equal for all countries and therefore speaks for universal convergence, but this is not what we see).

Question 17

Growth Acconting

Answer 17

Using Solow’s model to decompose growth into productivity or factor deepening (growth in factors of production).
By rewriting into log’s and taking the derivative w/r to time we get change in Y = A-growth + wKK-growth+ wLL-growth.

Question 18

Growth in output=

according to Solow’s growth accounting

Answer 18

= TFP growth + factor deepening.

But TFP will always be calculated as the residual since we have data on all other things but not A.

Question 19

Problem with A being a residual?

Answer 19

Mismeasurements in the other components will affect A = productivity.
Ex:
- wasted investments
- human capital hard to capture
- informal sector output not included in the Y

Question 20

TFP growth in low-growth countries?

Answer 20

It is negative (!) but instead focusing on factor deepening. But remember that TFP can be mismeasured.

Question 21

Why don’t banks serve poor peope?

Answer 21

• Admin costs (too small account)
• Far to bank offices
• Poor lack collateral
• High interest rates

Question 22

4 problems with the asymmetric information problem:

Answer 22

Adverse selection:
1. The selection problem - hidden information about who is a good/bad borrower.

Moral Hazard:

2. Cannot monitor - hidden actions
3. Cannot distinguish genuine/false failure and thus insure against bad luck
4. Cannot enforce repayment.

Question 23

2 costs of incomplete credit sector:

Answer 23

1. Efficiency cost: loans not related to marginal product of capital.
2. Equity cost: allocation of loans to wealthy reproduce poverty and inequality.

Question 24

How do poor people get access to credit?

Answer 24

Alternatives to banks use local info and social ties to overcome the problems:
- family or friends
- local money lenders with high interest rated
- micro-finance institutions
etc.

Question 25

Micro Finance Insitutions (MFIs)

Answer 25

Offer small loans to lower interest rates than money-lenders, how?
Because:
- Group liability
- Frequent installments (both for monitoring but also disciplining device)
- Self-selection by group memebers
- Dynamic incentives where loans are gradually increased
- Collective sanction in case of default

Question 26

Pros and cons of MFIs

Answer 26

Pros: access to cheaper credit
Cons: not flexible for urgent needs, not for risky long-term investments, still quite expensive, social cost in case of default etc.

Question 27

How do poor people save?

Answer 27

• At home
• Buying livestock, jewelry etc.
• ROSCAS

Question 28

ROSCAS

Answer 28

Rotating savings and credit associations:
Savings club with fixed rules, regular meetings where each contribute same amount to the pot which is then allocated to one person.

Question 29

Benefits with ROSCAS:

Answer 29

• Information sharing
• Social
• Commitment to save
• Fill a market lack
• Reduce uncertainty with the fixed rules

Question 30

Downside of “non-market institutions”:

Answer 30

• Build on social ties so participation is restricted
• Not very flexible, group liability and early repayment excludes riskier investments.
• High social cost of default

Question 31

Aim of endogenous models:

Answer 31

To explain A, interpret is technology and see how this component can grow.

Question 32

Tech as a public good?

Answer 32

According to Solow yes and therefore convergence, but not for the endogenous models. They see tech as excludable since there are always patent periods after a new R&D innovation.

Question 33

Two important takeaways from the endogenous growth model:

Answer 33

1. Technology is labor augmenting: at given K/L tech increases MPLy.
2. Increasing returns to scale: a given increase in La increase A and thereby Y more in a country that starts with higher A. –> divergence

Question 34

What happens with skilled albor according to the endogenous model?

Answer 34

Skilled labor will move to the rich countries where they can use their skills at a larger extent and also earn an income that is equal to their MPL, which is higher in a rich country. This is prob more true than the opposite.

Question 35

Shortcomings of endogenous model:

Answer 35

• All tech is not protected by patents.
• Able to leapfrog innovations, adopt instead
• Don’t explain why tech progress initiated in some countries but not others… Nor why som catch up

Question 36

Will firms invest max in R&D?

Answer 36

No underinvest, since the positive spillover effects in society and across firms are not internalized in the decision.

Question 37

Geographical clustering

Answer 37

Endogenous growth theory says that clustering is an outcome of spillovers etc since the closer firms are, the more they can benefit form each other. Ex blue banana for car sector in Europe.

Question 38

Spillovers

Answer 38

The mechanism through which productivity in one firm depends on what other firms are doing. Ex in form of:

• access to markets
• access to specialized labor
• common infrastructure
• forward/backward linkages

Question 39

Coordination problem

Answer 39

As stated before, productivity in one sector or firm will depend on what other sectors or firms do –> coordination problem that depends on expectations and information.

Question 40

Multiple equilibria in the coordination problem

Answer 40

There are multiple equilibria that are differently desirable. Individual firms’ decisions will be a reaction function of others do.
Risk averseness and uncertainty lead to underinvestment, must cross the 45 degree line to reach to the high equilibrium.
Spillovers help reaching it.

Question 41

Structural transformation

Answer 41

The change in the structural composition that happens when economies grow. The share of agriculture decrease –> manufacturing or today service sector.

Question 42

Share of labor in agriculture vs share of agriculture in GDP:

Answer 42

The share of labor starts at a very high point and shrinks as GDP grow. At the same time, the share of agriculture in GDP is always below (smaller) and decreases as well but at a slower pace.
–> Higher gap in poor countries, where labor share is high but less productive.

Question 43

Structural transformation:wage in industry

Answer 43

Must be at least equal to the wage in agriculture + the migration cost. Labor market in equilibrium when:
Wm = Wa + delta

Question 44

What is the thing differing between dual economy models?

Answer 44

The assumption about the labor force. Lewis believe in surplus A, Jorgenson no surplus in A.

Question 45

Lewis dual economy model:

Answer 45

Assumes surplus labor in A –> food prices doesn’t increase when L move, hence no change in nominal wages in industry (capital owners get all benefits from investments). Agri serves as a passive role, providing L and food. –> Policies only focused on urban.

Question 46

Jorgenson dual economy model:

Answer 46

No surplus in A so that wage=MPL –> workers move to urban manufacturing will increase food prices –> nominal wages rise. This will halt the industrialization since less profits over to invest.
–> Need tech change in A!
Ex. Green revolution. Output in A must be maintained when labor move.

Question 47

Disguised unemployment, dual economy model:

Answer 47

Now 0

Question 48

Other ways for A to contribute to growth (despite L and food):

Answer 48

• Often large sector in LDCs -if it grow, total GDP grow.
• Intersectoral linkages - if A grow, sectors in the value/supply chain grow.
• Consumption linkages - higher earnings in A create more demand.
• A as a comparative/competitive advantage.

Question 49

Pro-poor growth: 2 measures

Answer 49

Absolute pro-poor: when growth reduce overall poverty. Elasticity of poverty reduction>0.

Relative pro-poor: when growth benefit the poor relatively more than rich. Elasticity>1.