Growth Theories

Question 1

Neoclassical Exogenous Growth is also known as….

Answer 1

Exogenous Growth Theory

Question 2

Neoclassical Growth is a result of..

Answer 2

Capital, labour (accumulation) and tech progress

Question 3

Solow-Swan Model (Exogenous Growth)

Answer 3

Y=f(A,L,K)
Assumptions: constant returns to scale, perfect mobility of factors of production, no barriers to entry and exit, no externalities, homogeneity of factors of production, exogenous technology.

Question 4

SS Steady State

Answer 4

Investment equals depreciation

Question 5

SS driver of growth

Answer 5

Can’t explain increased income over the last century by capital accumulation. tech progress drives growth

Question 6

SS applied to regions (Equilibrium)

Answer 6

Same tech progress, marginal productivity is determined by ratio of K:L since worker productivity is determined by capital per worker

Ka/La > kb/Lb then MP is higher in A and labour is attracted region A whilst B has influx of capital - Equilibrium

Question 7

Empirical Evidence of regional convergence

Answer 7

After 1950 regional convergence at about 2% per annum in many nations (Barro, 1995)

Question 8

Empirical Evidence of divergence

Answer 8

Chatterjee et al (2021) shows convergence between countries but divergence within countries because of agglomeration economies.

Adoption rate (spread) of technology is slow
Regions not so integrated
People not as prone to moving
Diminishing marginal product assumption is wrong -Density and Wage relation

Ganong and Shoag (2017) - convergence has slowed down dramatically in the US

Increase in house prices in high-income places
Divergence in skill-specific returns
Redirection of low-skill migration away from high-income places

Question 9

Endogenous Growth Theory criticises…

Answer 9

SS model

Question 10

Romer says

Answer 10

Tech that explains increasing returns external to the firm
- intellectual capital ‘learning by doing’
- spillovers in production, socially increasing returns but maintains a privately strong competition. Firms get most of reward but there is a spillover that benefits the rest

Question 11

Frankel Model says

Answer 11

Accumulation of capital leads to growth forever

Question 12

Romer equation

Answer 12

Y= f(K,L,E)g(N) where E is human Capital/Tech progress and g(N) is the stock of natural resources

Romer developed endogenous growth theory - idea that productivity growth can be influenced by stuff in the rest of the economy

Question 13

Lucas, 1988

Answer 13

Y=A K^a (uh) ^(1-a)

K is capital A is tech progress alpha represents share of capital in production
Mu is fraction of total labour time spent on work, H is human capital L is labour force

• Accumulation of human capital can lead to sustained economic growth
• endogenous growth is driven by human capital accumulation

Unlike solow where growth eventually stagnates, Lucas model suggests that increasing investment in education and human capital can lead to sustained economic growth

Question 14

Lucas Explained

Answer 14

Y=A K^a (uh) ^(1-a)

K is capital A is tech progress alpha represents share of capital in production
Mu is fraction of total labour time spent on work, H is human capital L is labour force

• Accumulation of human capital can lead to sustained economic growth
• endogenous growth is driven by human capital accumulation

Unlike solow where growth eventually stagnates, Lucas model suggests that increasing investment in education and human

Question 15

Barro, 1991

Answer 15

Controls for the drivers of neoclassical growth: fertility rate and investment/savings

Finds that human capital and various policy variables are particularly important in explaining growth

Strong evidence in favour of endogenous growth theory

Question 16

Rosenthal and Strange, 2008

Answer 16

Huge depreciation with distance of human capital externalities - AGGLOMERATION = More Spillovers = more productivity

Question 16

Rauch, 1993

Answer 16

Shows that rents and wages increase near college-educated people, productivity increases near highly educated people, wages and rents rise with education

Question 17

Convergence vs divergence?

Answer 17

Knowledge and human capital are to some extent bounded within regions and also the drivers of productivity and growth.

Human capital development and technological leadership can produce lock-in and path dependence as seen with all the major global cities.

Question 18

Origins of NEG

Answer 18

Krugman, 1991

• Increasing returns to scale and imperfect competition
• Constant returns, perfect comp and Comparative advantage no longer explained trade patterns
• Tech and externalities underpinning this were from local agglomerations

Question 19

Key Points NEG

Answer 19

Skilled workers move, unskilled do not

Production concentrates in large market, determined by where people move

The lower the trade costs, the stronger the firm concentration in one region

The higher the economies of scale the more concentration

Growing integration of markets should lead to bigger disparities

Question 20

Examples of Circular cumulative causation

Answer 20

Seattle -snowballing economy

Picked by Bezos for Amazon because Microsoft was there with a big talent pool

Question 21

Moretti, 2010 (CCC)

Answer 21

Places that grow attract highly educated, which increases diversity of local goods and services - Moretti, 2010

Question 22

What is CCC, who citations

Answer 22

About positive feedback (Arthur, 1990), self-reinforcement
Path dependence - product of the past events - hard to mess up, hard to stop

Myrdal, 1957 : no tendency to stabilise. Constantly moving away from that. Circular causation becomes cumulative and gathers increasing speed.

Question 23

Criticism of NEG (Martin, 1999)

Answer 23

Not New and not Geography

Question 24

Key use of NEG model

Answer 24

tells us when place-based policy is most likely to work - when people are unwilling to move - tells us that effective policy can be incredibly cheap due to lock-in - Does work in reality and explains trade patterns

Question 25

Puga, 2002 - History of EU REGIONAL INEQUALITY

Answer 25

Large spending, European regional inequalities have not narrowed since 2000 - potentially widened

Question 26

Puga, 1999 - stat on inequality

Answer 26

1 in 4 people live in areas that have a GDP per capita less than 75% of EU average - if same thing was done in the US, only 2% of US population would qualify

Question 27

EU funding too small stat

Answer 27

EU regional funding account for around 30% of total EU spending, and about 0.4% of total EU GNP

Question 28

Midelfart-Knarvik, 2000 Inequality stat and strength of it

Answer 28

1992, ten best-off regions had GDP per capita 3.5x ten worst-off in EU - only 1.5x in US Paper is before A8 as well - likely to be much more concentrated

Question 29

Perez and Serrano (1998)

Answer 29

find that only 33.2% of unemployed people would take a job away from place of residence if offered one Potentially to do with family and government - family support when unemployed

Question 30

Faini et al., 1997

Answer 30

higher family income makes someone more likely to move for work

Question 31

Do you need people to move (argument pro place-based policy)

Answer 31

Germany post-reunificiation - little movement of people, yet wages in the east rose 42% in half a year

Question 32

Krugman and Venables, 1990 explores

Answer 32

implication of these models for location and the effect that reductions in trade or transport costs have on it Assume two regions - large core, small peripheral Two factors of production, mobile across Sectors but not regions Core region has larger factor endowments than peripheral region, although same relative advantage Two production sectors - one perfectly competitive, produces a freely tradeable homogeneous commodity under constant returns to scale Other sector is imperfectly competitive, firms produce differentiated manufacturers under increasing returns to scale - labelled manufacturing

Question 33

Krugman and Venables, 1990 conclusion

Answer 33

Under equilibrium, core has a larger manufacturing sector than periphery Important finding - for finite positive trade costs, the core’s share of industry is larger than its share of endowments Net exporter of manufactures Share of industry also changes non-monitcally with trade-costs High trade costs, firms sell mainly in their own local market Therefore if a region had more firms relative to its market size, competition would lead local firms to exit - result - each firm has a similar share of industry to its endowments Economic integration - increases shares of sales that each firm makes in other region - weakens the effect of mor elocal competitors in each firm’s market share Increasing returns imply that the larger sales of firms producing in the core regions gives them higher profits - more firms enter, size of industry increases above its factor endowment As trade costs approach 0, demand for local factors is the main thing that determines location - so differences in both nominal and real wages decreases, while share of region’s industry goes back to its share of overall endowments Shows how a priori very similar regions can end up with very different production structures and income levels Simplest such mechanism arises when one introduces some mobile sources of demand

Question 40

Growth Models Linked

Answer 40

How do countries grow their GDP? Exogenous model at the forefront from 1930-1980 - Solow Swan Romer - endogenous growth builds on dixit-stiglitz MC model Lucas - Endogenous Growth How do countries trade based on GDP? Gravity Model - Tinbergen (Not really linked to the above