Growth and Growth Models

Question 1

Problems with GDP

Answer 1

Does not compare well across countries and cost of living (PPP needed)

Question 2

Technical problems with GDP

Answer 2

• Informal sector
• Quality of data
• Domestic consumption, household labor
• Environmental destruction

Question 3

HDI based on

Answer 3

• longevity (life expectancy)
• education (literacy, enrolment)
• Log of real per capita PPP GDP: decreasing returns

Question 4

Coordination Failure

Answer 4

• can lead to a sub-optimal equilibrium
• benefits to agent of taking action depends positively on how many others have taken the same action

Example:

• a firm will not locate in an area if workers do not possess the skills the firm needs
• workers will not acquire the skills if there are no firms to employ them

Question 5

More examples: training and infrastructure

Answer 5

• first firm trains workers
• other firms (without training costs) offer higher wages
• first firm does not train in the first place

Infrastructure:

• huge fixed costs of infrastructure borne by some firms
• other firms benefit without paying
• forward/backward linkages!!!

Question 6

Intertemporal effects?

Answer 6

Invest in new technology increases wage income. That benefits other firms

Question 7

O-ring theory

Answer 7

Strong complementarities across activities, firms, workers
Example:
2 tasks
0 ≤ q ≤ 1: skill needed for the task (or probability the task will be completed successfully)
O-ring production function: q1* q2

Imagine that two types of workers:
qH: High quality
qL : Low quality
Then who should go with who?
If matched: qH* qH + qL* qL
If not matched:2*qH* qL

Question 8

Implications of O-ring theory?

Answer 8

• qH2 + qL2 > 2qH qL
• Positive assortative matching
• Firms that start with high productivity workers can afford to offer higher wage to get additional high-quality workers
• Marriage

Question 9

Where to invest?

Answer 9

Incentives to invest in training:
Firm 1: q=0.2
Firm 2: q=0.8
Training can bring 0.1 to 1 worker
Results:
Firm 1: 0.2*0.2=0.04 to 0.2*0.3=0.06, +0.02
Firm 2: 0.8*0.8=0.64 to 0.8*0.9=0.72, +0.08
Greater incentives to invest in firm 2

• Big firms in developed countries, small firms in developing countries!!!
• Brain-drain
• Gov. intervention needed