Chapter 4: Macroeconomic growth Flashcards
Conclusions of the growth history
- the steady improvement of standards of living for the average individual cannot be taken for granted
- there is convergence in standards of living in some cases, but not always
- In Western Europe, the very high economic growth
between 1945 and 1973 (“les trente glorieuses”) is atypical
from a historical perspective
determinants of economic growth
- ntroduction
- GDP Production Function
- Sources of GDP/cap. Differences
- Growth Decomposition
Two elements can make an economy larger and richer
1) Greater quantity of available factors of production —
physical capital, labour (raw materials, energy)
2) Better factor productivity
Four determinants of the size (i.e., activity level) of an
economy
1 Labour productivity
2 Employment rate
3 Population pyramid
4 Population size
GDP Production Function
The GDP production function is a conceptual tool expressing the relationship between:
- final aggregate production (GDP)
- factors of production sharing the proceeds of value-added
creation (namely, capital and labour)
☞ The per-capita income in an economy is therefore
determined by
1 the per-capita productive capital stock kt
2 the employed share of total population 𝜆t
3 the total factor productivity At
☞ GDP/cap. differences can be
- between countries at the same instant ➙ synchronic
- within a given country over time ➙ diachronic
Productive Capital Accumulation ➙ k
Some Determinants
1 Institutional/Political
➥ Political stability
➥ Legal framework and protection of property rights
➥ Attitude towards free trade
2 Economic/Financial
➥ Presence of sufficient (either domestic or foreign) financial
capital for making investment possible
➥ Development of the financial system for allocating funds to
those who need them for productive purposes
➥ Cost of capital (price of investment goods & financing costs)
3 Human
➥ Availability of adequate workforce
➥ Entrepreuneurship
4 Negative
➥ Destructive: wars or natural disasters
➥ Inhibiting: corruption, political instability or predative tax
system
, the employed share of total population is
determined by
1 Population pyramid
2 Employment rate
Total Factor Productivity ➙ A
Some Determinants
1 Technology
2 Human capital
3 Some other determinants of A
GDP growth can therefore be the consequence of
1 an increase of At, that is, an improvement of total factor
productivity
2 an accumulation of productive capital
3 a growth of employment due to
- an increase of the share of the population that is employed
- population growth
The evolution of per-capita income therefore depends on the growth of
1 the total factor productivity (technological progress. . . )
2 the per-capita productive capital stock
3 the share of the population that is employed
Impact of Population Growth
Conclusions
1 Population growth increases per-capita income only if the
productive capital growth is more than proportional
2 If productive capital accumulation is insufficient (i.e., k
decreases), then population growth will impoverish the
average person
3 Extreme case: no capital growth
☞ The evolution of the productive capital stock results from two opposing forces
1 Investment in new productive equipments It
2 Depreciation of existing capital stock 𝛿 Kt as a result of usage (the depreciation rate 𝛿 ∈ (0, 1) is assumed constant)
At ka the investment curve s f (k) is above the depreciation
line 𝛿 k and the capital stock increases between t and t + 1
➥ Growth of capital stock (total and per capita)
➥ Growth of GDP (total and per capita)
At kb the investment curve s f (k) is below the depreciation
line 𝛿 k and the capital stock decreases between t and t + 1
➥ Contraction of capital stock (total and per capita)
➥ Contraction of GDP (total and per capita)
At k∗ the investment s f (k) exactly equals the depreciation
𝛿 k and the capital stock is constant between t and t + 1
➥ Capital stock (total and per capita) remains constant
➥ GDP (total and per capita) remains constant
➥ The economy has reached a steady state
Lessons Learned
Investment
Lesson #1
Investment is indispensable to growth
Lesson #2
Investment is not sufficient on its own to generate perpetual
growth
Lesson #3
The steady-state per-capita income increases when
1 total factor productivity improves
➥ The production and investment curves swell upwards
2 the saving rate increases
➥ The investment curve swells upwards
3 the equipment depreciation rate falls
➥ The depreciation line becomes more horizontal
Lesson #4
The saving rate of an economy influences
the income (per capita) in the steady state
the speed of transitory growth towards the steady state
Lessons Learned
Investment
Lesson #1
Investment is indispensable to growth
Lesson #2
Investment is not sufficient on its own to generate perpetual
growth
Lesson #3
The steady-state per-capita income increases when
1 total factor productivity improves
➥ The production and investment curves swell upwards
2 the saving rate increases
➥ The investment curve swells upwards
3 the equipment depreciation rate falls
➥ The depreciation line becomes more horizontal
Lesson #4
The saving rate of an economy influences
the income (per capita) in the steady state
the speed of transitory growth towards the steady state
Lesson #5
There is convergence between economies with similar structural
parameters (technology, saving rate, depreciation rate)
Lesson #6
There is no absolute (unconditional) convergence between
economies
Lesson #7
The steady-state level of GDP/cap. depends negatively on the
population growth rate
Lesson #8
With population growth, there is perpetual growth of K and Y
catch-up effect
An economy that is initially poor would grow faster than a
richer but structurally-comparable economy
If any of the 3 following situations occurs, then this country
might remain stuck in a “poverty trap”
1 Increasing returns to scale at low-income levels
2 Saving rate depends on the income level (in particular,
saving is hardly possible at low-income levels)
3 High population growth at low-income levels
Three Causes of Extreme Poverty
Implications
☞ In situations 1 and 2, the country can benefit from (foreign) capital inflow ➥ To local governments? ➥ As foreign direct investment (FDI)? ➥ Good-governance issues?
☞ In situation 3,
➥ foreign capital inflow can be a solution
➥ but birth rate reduction could also work
Solow-Swan With Government
Assumptions
1 Public expenditure = only public consumption = G
2 In every period, public expenditure is financed by an
equivalent tax T on households
3 In every period, public expenditure is a fixed fraction
𝛾 ∈ [0, 1) of GDP
