Exam 2 Flashcards
Solow Model: limitations
- doesn’t explain LR g
- non-convergence (absolute)
- solow residual: most g due to tech. g
Solow Model: assumptions
- CRS: y=f(k,l)
- dim. returns
- L grows @ n
- assume d
- tech = exogenous
Solow Model: contributions
- svgs does not leaf to LG g%
- convergence (LDCs catch up)
Solow Model: results
- sy > (ntd) ^K -> change ^k >0
- ^K > 0 => sy incr
- g until new steady state
- absolute convergence does not hold
Know the puzzles unexplained by Solow.
a
Similar to above point, know the advances in general of the new endogenous growth theory
- ideas > things
- increasing returns to scale: double inputs => output more than doubles
- (Lucas) human capital => assumes laborers always same but labor improves w/ education & training over time => L increases
- (Romer) technical progress should be endogenous
=> explains how arises and what it is/comes from
=> explained by 2 notions: 1. Solow residual problem 2. non-converge
Lucas’ model assumptions
1) y = f(k,l,hk)
2. assumes external effects
Lucas’ model contributions
1) MPKldc > MPKdc
- > dont see bc HK & educ lvls not high enough to absorb R
Lucas’ model results
- divergence
- > countries with low HC perform below high HC
Lucas’ model limitations
- brain drain
- how help educ./grow?
Lucas model internal and external effects, and why there is a creation of positive externality
why individuals accumulate education:
- internal reason: career, pay w/tuition & time => accumulation
- external reason: learning contributes to societal knowledge - spillover = extra benefit to societ
=> external effect = positive externality –market failure
Why there is policy intervention for education
why individual accumulate education:
- internal reasons: career, pay w/ tuition & time => accumulation
- external reasons: learning contributes to societal knowledge - spillover=extra benefits to society
How policy intervention will not work for LDCs (brain drain)
subsidizing education -> smarter citizens- who may leave
problem = weak labor markets in LDCs => not creating enough employment opportunities (problem not lack of sub. educ.)
LDC response: braindrain > in a drain
Romer: the externality created here.
- ideas are paritally excludable
- > ex. patents (excludable through patents but you can reverse engineer/ideas leak out and partially b/c people can get idea by studying product)
=> govt. intervention
-> positive externality -> adds to stock of knowledge
How ideas are different than things?
- how things used influence output
- ideas are:
1) non-rival - can be used @ same time w/o decr quality
2) partially excludable - patents (govt intervention) but ideas leak out
=> positive externality
how do ideas arise?
- production lines - experiment w/ slight (“obvious”) changes (i.e. rearrange)
- profit motive => intentional actions taken by individuals
- individuals = problem solvers & experimenters EX. mass production/assembly line
incentive to incr ideas in market econ:
- profit
profit from ideas by:
- sell better products
- comparative advantage
- patent new/original idea
Know the broad points of what we have learned from growth models (see Homework 2 where we compare the growth models )
a
Marx’s critique of capitalism (false consciousness, etc.)
- alienation -> repeated boring job
=> alienated from self
=> alienated from others
- false consciousness - workers dont know being alienated, being exploited
workers: rely on incr salaries for motivation more than other reasons
How Marxist-communist-socialism can appeal to LDCs
appeal:
- equality & security to a highly unequal & insecure society
- soviet union industrialized so fast
- centralized power -> authoritarian gov’t possible
How Marxist-communist-socialism can not appeal to LDCs
limitations:
- corruption: “some are more equal”
- not many incentives to work harder -> equal society
- associated with “big brother”
The Marxist influence on development thought (power relations to cultural imperialism)
a
Advantages of market/when market fails. In particular how govts intervene with declining AC curve.
a
What we mean by state capitalism and state capitalism 2.0
- (china, brazil, venezuela): large presence of state
- many of the world’s biggest oil firms are state backed (75% of world’s reserves)
state capitalism: adavantages
- infrastructure, mergers create big companies for emerging markets allows innocation
- mergers incr strength and incr bargaining power vs small private LDC firms
state capitalism: disadvantages
low productivity, state owned enterprises, political corruption
Know all the main points of the big China article, especially those covered in class, I have also added some slides with the main points, also know the expectations model with Deng Xiaoping’s announcement.
a
surplus labor
3 interpretations
- can remove workers w/o decr output
- marginal productivity of labor (MPl) = 0
=> no contribution of additional worker
- MPl = m, subsistence wage [surplus labor]
dualism
- wider concept of 2 contrasting sectors co-existing
- agricultural production function
- agr./industry
double dualism
- formal/informal
- > urban sector - (1) high wage govmt jobs -> formal
or (2) lower wage street vendors -> informal
-> rural sector - (1) township enterprises -> formal
or (2) small landowning farmers -> informal
Know the Lewis model and its policy implications (for example, China and its labor surplus policies)
a
Lewis model assumptions
- urban wage, w-bar, is a fixed mark-up, rigid downwards-> urban higher cost of living
- both agri. and industry produce same good -> not worry about terms of trade
- Y = F(L) shortrun
- subsistence wage in rural = m < w-bar
lewis model: movement from agriculture to industry necessary for 2 reasons
- engel’s law
- economies of scale
Contrast the implications of the Lewis model and reality
part I
during 70s and 80s, UN conference on urbanization
=> poll: was urbanization a problem?
- slow urbanization
- reverse migrations
- maintain urbanization
- speed up migration
(lewis model goes in opposite direction (4,3,2,1)
Contrast the implications of the Lewis model and reality
part II
surprising: vs. lewis & industrial bias
poverty & slums
double dualism
pop. growth: incr surplus labor
labor absorption: labor intensive industries
(rate of pop g < rate of labor absorption)
policies misguided: kenya 1964
why do people migrate?
- > very complex decision ( not only b/c of lewis wages ideas or jobs)
- > interactions, culture, public goods
policy misguided: Kenya 1964
- larger number of govt jobs available to decr unemployment, but actually incr unemployment
- > more people migrated to city so unemployment incr.
Understand the Fei-Ranis model of Lewis (Homework 2)
a
Know some of the lessons from moving from agriculture to industry, Engel’s Law and sectoral shifts contribution to growth.
a
Understand the meaning behind Rosenstein-Rodan’s shoe factory model (big push theory) and how it can give rise to a market failure
big push idea: hard for modern industry to start up in LDC bc not enough ppl w/ $ to buy products of 1 (shoe) factory
=> situation 1 - if expand, who will buy the shoes?
- when ravelling backwards-> will not expand
- instead, develop wide range of industries all @ same time so workers in each factory have income to buy products
=> situation 2 - shoe, food, clothing all expand @ same time
-> only way to achieve broad-based development = government plan (=> guide producers & guarantee demand)
SEE NOTES FOR THE REST
Understand the limitations of the shoe factory model
- (1) said would not expand, but could sell on a global scale
(2) -> assumed closed economy => cant export shoes (pessimism)
how to resolve: some nontradables that cannot import/export
Examples of backward linkages and forward linkages and leading sectors
backward linkage - demand reaches back to other industries
=> ex. coal, iron, steel
forward linkage - output of industry is used for other industries
=> ex. transportation
leading sector pulls/pushes rest of economy through series of linkages
=> has linkages on its own
ex. railroad: leading sector
Difference between balanced and unbalanced growth
balanced growth: growth @ same time
unbalanced growth: only focus on some b/c you dont have enough funds to focus on all
Determining which is a good sector to get into
- # of linkages
- strength of linkages
- intrinsic profitability
Know the advantages of consumption over income in calculating distributions.
ppl consume income -> difficult to get actual income -> use consumption instead -> many poor LDCs
- hard to measure income in poor countries
- consumption may be more reliable indicator of welfare bc does not fluctuate as much
Know the shape of frequency distribution of income and consumption
- log normal (log of normal distribution
- greater mass/”hump” focused at lower end of income (left)
- similar for all countries not just LDCs
Calculate Quintile Ratios
top 20%/bottom 20%
Draw the Lorenz Curve and calculate the Gini Coefficient (see also homework)
a
Know the limitations of the Lorenz Curve and the Gini Coefficient
a
Know the stylized facts on inequality and Gini coefficients around the world
a
Know the difference between inequality and poverty.
poverty = absolute concept
inequality = relative concept
headcount index and why it matters which we use
- % of people below poverty line
- most direct
- proportion of ppl that are poor
poverty gap
- measures “depth” of poverty
- the transfer needed to bring ppl out of poverty
squared poverty gap
- looks @ severity of poverty
- value what happens to the poor more - weighs poorest more
Calculate headcount index and poverty gap given certain numbers (see homework 3 too)
a
Know the stylized facts on Global poverty (is it falling, where is it most concentrated, etc.)
a
Understand the Kuznets curve relationship, if it holds, and why the Lewis model predicts the Kuznets curve
a
Know the main points of Piketty article as discussed in class
a
Know the combination of history and politics and policy causes (or reduces) inequality
a
Understand why inequality is possibly inevitable and what are some harmful effects of inequality
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Know if global inequality is rising or falling (depending on how we measure it)
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Article: Botswana
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Article: Country Case Study 2 – China
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Article: China After Party (I know we didn’t go over this but need to know main points)
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Article: Is China still a developing country ?
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Article: Labor Surplus in China
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Article: The Nomadic Village of Phala
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Article: Country Case Study 3: Brazil
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Article: Brazil and the World Cup
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Article: Piketty and Inequality (only what we discuss in class)
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Article: The Gold Medalist (and the discussions in class on S Korea)
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Article: What do you do when you reach the top ?
a
romer model: assumptions
- y = f(k,l,ideas)
romer model: contributions
- ideas dont hit diminishing %
- need education -> foster ideas
- define tech
romer model: results
- IRs w/ ideas
- makes g & accum. possible
romer model: limitations
- LDCs contributors to ideas? (imitators vs innovators)
- LDCs adapt/improve on existing ideas
