Explaining Economic Growth In The Long Run Flashcards
Growth clubs and traps
Although convergence does well among rich nations. On a global scale there is little to no evidence.
In some poor countries income differences have widened.
Poorer countries may not have enough capital accumulation due to inadequate saving or destruction by war/natural disaster.
Out of steady state I doesn’t have to equal S, it is very possible for foreigners to invest in poorer countries. This should be expected if capital is free to move. MNCs looking for low K to L ratio as it reaps higher returns.
Chronically poor countries may suffer from tech backwardness.
The fact that poorer countries don’t converge calls to question whether free trade actually benefits all.
What is conditional convergence?
The notion that convergence occurs, but to steady states that depend on the individual attributes of an economy, or region.
What are the 6 main missing inputs?
Human capital - basic literacy to sophisticated skills.
Health - raising life expectancy by 10 years speeds up growth by 0.8%
Fertility - a 50% increase in average number of children per woman has a negative effect of 0.6% on the growth rate.
Public consumption - reducing PC by 10% of GDP raises growth by 0.6%.
Public infrastructure - improvements on streets, public transport, airports etc can increase GDP growth but government doesn’t directly reap the benefits so isn’t as attractive to invest in.
Social infrastructure - property and human rights, protecting people and their property.
What are the characteristics of endogenous growth?
- When marginal productivity is constant the f(k) is a straight line.
- If saving is large enough to exceed depreciation and the need for capital widening, the capital stock will increase without bound.
What is a mashillian externality?
An externality occurs when the actions of an individual effect the welfare/productivity of others in ways that aren’t mediate by the market.
How can marshillian externalities lead to endogenous growth?
If the externality causes conditions of constant returns to scale with respect to accumulated factors only (K,H,Kg) then the marginal productivity need not decline with growth.
Evidence of endogenous growth?
When growth slows firms invest in R&D. Eventually resulting in a number of innovations.
Huge profits bring fierce competition through improvement or imitation.
When profits start to fall firms reduce R&D
Tech progress slows slows ending the big wave of accelerated growth
As profits decline a new age of entrepreneurs emerge and prepare the next long wave.
Name the growth policies
- Education and Research: Intellectual property rights, Patents, competition policy
- Politics: Democracy, stability, equality.
What is the convergence hypothesis?
Given similar underlying conditions, GDP or income per capita should converge in level and growth rate across countries. Furthermore the more distant a country’s GDP from its steady state the faster it will grow.
