growth theories from smith to today

Question 1

what was the classical theory of growth?

Answer 1

classical economists argued that in a market economy, business would be led by the price mechanism. a change in either consumer demand or the techniques of production would signal through price mechanisms an automatic reallocation of resources that would move the economy to a state of equilibrium. economic growth according to the classics was determined by investment in land and capital plus the supply of labour

Question 2

what was keynsian economics arguing interwar unemployment was caused by.

Answer 2

deficient aggregate demand.
keynes emphasised that private investment was the most unstable and unpredictable component of AD as it was crucially determined by business expectations which were subject to booms and slumps in confidence

Question 3

what was the keynsian remedy for unemployment?

Answer 3

the keynisian remedy was for the public sector to invest if the private sector would not thereby boost AD and thus return national income to a high and stable equillibrium

Question 4

what was the classical market explaination for savings and investment?

Answer 4

they assumed that both savings and investment are functions of the rate of interest and thus consistent with standard price theory. if investment was to fall, then the demand for funds will shift back, the rate of interest falls and equilibrium between savings and investment is thus restored

Question 5

what was keynes theory for savings and investment?

Answer 5

he argued that savings are primarily determined by incomes S=f(y) and investment is primarily determined by expectations I=f(e). equilibrium income is where savings is equal to investment. if investment falls then aggregate demand falls which implies less sales, income and employment which will lead to a fall in the national income until I = Y

Question 6

what does the harrod domar growth model assume about Capital?

Answer 6

it assumes a given savings rate S/Y=s and a given productivity of capital dK/dY = c then the rate of growth in an economy is equal to s/c, for example if 12% of income was saved and invested and for every 4 units of capital, 1 unit if output is produced then the rate of growth will equal 12/4 =3%

Question 7

what does the harrod domar growth model assume about labour?

Answer 7

assume a given rate of increase in the labour force n and a given rate of increase in labour productivity p then the natural rate of growth of output required to keep the labour force fully employed would be n+p

Question 8

what does the harrod domar growth model state for equillibrium?

Answer 8

equillibrium in the economy is achieved if the rate of growth of aggregate supply equals the rate of growth of aggregate demand, if capital output and productivity matches that of labour then s/c= n + p

Question 9

what is Harrods knife edge#/

Answer 9

companies adjust investment according to what they expect about future demand, and the anticipated demand was forthcoming then the growth in capital stock would equal growth in the labour supply. but if the actual demand exceed anticipated demand, then companies would have underinvesteed and respond by investing further. this investment would itself cause growth to rise therefore requiring further investment. it will result in explosive growth
if actual demand falls short of anticipated demand then companies would have overinvested and would respond by cutting back making the problem worse. this will lead to a deaccleration of growth

Question 10

are the key coefficents in the HD model endogenous or exogenously given and are they fixed or flexible

Answer 10

they are exogenously given and they are fixed

Question 11

what is one important assumption in the harrod domar model?

Answer 11

labour is not substitutable for capital

Question 12

what makes the harrod domar growth model keynsian?

Answer 12

if buissness expectations of future demand are misguided then there is either a boom or slump that gets progressively worse. in neither case there is a return to equillbrium as long as there is no change in substitutibility and techniques of production. therefore it requires government intervention to manage the level of aggregate demand and thus ensure balance

Question 13

what provides the rationale for government intervention and planning?

Answer 13

substantial external economies

Question 14

what did rosenstein- Rodan emphasise the government to do?

Answer 14

the complementarity of industry and provide public and merit goods such as education, training, transport and communications etc.

Question 15

what were rostows 5 keys steps that all countries must go through to attain development are?

Answer 15

• The traditional society, where nearly all employment is in subsistence agriculture and low living standards prevent much saving and investment.
• The pre-conditions stage, where agricultural productivity rises and an entrepreneurial merchant class emerges.
• The Take Off stage, where increasing investment and growth in a leading sector in the country generates enough momentum to lift the entire economy to a higher rate of growth.
• The drive to maturity stage, where success is broadcast to include other sectors, such that the increased pace of investment and growth becomes self-sustaining.
• The stage of high mass consumption is finally reached where living standards are increased for all.

Question 16

what are the key components of rostows anaylsis?

Answer 16

• low level equilibrium trap
• preconditions or foundations for growth* ‘big push’
• importance of a lead sector (unbalanced growth) in the neo-classical tradition in that it advocated a greater role for markets than government.

Question 17

what was the neoclassical growth theory?

Answer 17

the solow model

Question 18

what does robert solow assume?

Answer 18

• competitive markets,
• flexible prices
• a given state of technology, and
• employment of labour and capital that (unlike Harrod-Domar) could vary in proportion to one another as their prices changed.
• it used the standard cobb/douglas production function Y=f(K,l)
• diminishing marginal returns to either capital or labour
• increase in both inputs will result in constant returns to scale

Question 19

how is the solow model represented graphically?

Answer 19

we can illustrate the model economy by considering how output per head (Y/L) changes if capital K acculates with a given labour force L or K/L. the result is diminishing marginal returns as output per head grows at a slower and slower rate as the capital - labour ratio K/L increases (given no change in technology)

Question 20

what shifts the solow model?

Answer 20

a revolutionary change in technology which is an exogenous change in the solow model is neccessary to shift the production function. at each level of capital per head, now output per person or living standards are higher

Question 21

what are the predictions of the solow model?

Answer 21

• Countries with low capital stocks have faster growth
• Countries with large capital stocks have slower growth
• Countries with same growth rates of labour and capital and access to the same exogenous technology will attain convergent incomes per head
• Increasing savings rates lead only to diminishing returns and steady state
• Exogenous changes in technology can shift up the short term growth rate
• Recurring technological shocks are required to secure increasing income per head and escape from steady state

Question 22

what was paul romers arguement?

Answer 22

he argued that it was possible for firms to invest in research which brings diminishing private returns but increasing social returns

Question 23

what are the assumption of Romers growth model?

Answer 23

it makes the same neoclassical assumptions of competitive markets and flexible prices in the solow model but:
* Technology is endogenously produced in new research and may be embodied in new capital equipment or disembodied in new practices, organisations, institutions.
* New technology is expensive to produce but cheap to copy
* Positive externalities imply private diminishing returns but constant social returns to capital accumulation and thus increasing (social) returns to scale.

Question 24

how fast does technological information double?

Answer 24

it doubles every 2 years. in a four year technological degree half of what you have learnt in the first year is out of date

Question 25

what do most models suggests causes growth?

Answer 25

exogenous changes in technology of total factor productivity

Question 26

where does Arro say the rise in total factor productivity come from?

Answer 26

it comes from learning by doing

Question 27

why might it be argued for governments to do reaseach and development?

Answer 27

the more technology developed here the more it can be broadcast at zero cost to other sectors. since ideas cannot be privately captured this implies a role for government funded research

Question 28

what is the case study of the asian miracle and modern growth theory according to nelson and pack?

Answer 28

there was enormous structural changes in the export mixes in the economies.
there were high rates of investment in both physical and human capital
the countries had to learn new sets of skills, new ways of organising economic activity and to become familiar with and competent in new markets

Question 29

how does Hyundai engineers show the process of learning by doing?

Answer 29

there was 2888 engine design changes, ninety seven test engines were made before hyundai refined its natural aspiration and turbocharger engines. more than 200 transmissions and 150 test vechiles were created before hyundai perfected them

Question 30

what is joseph schumpter theory of creative destruction as a theory of economic growth?

Answer 30

faster growth generally implies a higher rate of firm turnover, because this process of creative destruction generates entry of new innovators and exit of former innovators.

Question 31

what is the effect of new firm entry and entry threat when the incumbents in the sector or countries that are initially close to the frontier line?

Answer 31

New firm entry, and entry threat, enhance innovation and productivity growth among incumbents in sectors or countries that are initially close to the technological frontier, as the escape entry effect dominates in that case

Question 32

what is the effect of entry and entry threat when the incumbents in sectors or countries that are far below the frontier?

Answer 32

Entry and entry threat discourages innovation and productivity growth among incumbents in sectors or countries that are far below the frontier, as the discouragement effect dominates in that case.

Question 33

how would a country maximise growth when they are far from the frontier?

Answer 33

they will maxise growth by favouring institutions that facilitate implementation, however as it catches up with the technological frontier to sustain a high growth rate the country will have to shift from implementation enhancing institutions to innovation enhancing institutions

Question 34

what does Aghion and Howitts suggest about education?

Answer 34

as a country moves closer to technological frontier, tertiary education should become increasingly important for growth compared to primary/secondary education.
emphasis on primary and secondary is fine when the growth mechanism is based on imitation however

Question 35

with imperfect financial and labour markets, firms cannot be left with support in recessions so government need to ?

Answer 35

• Occupational and geographical mobility of capital and labourwill need to be encouraged and supported.
• R & D funding may need to be subsidised in slumps wherefinancial markets are closed

Question 36

what is the schumpeterian view of buissness cycles and growth?

Answer 36

recessions provide a cleansing mechanism for correcting organisational inefficiencies and for encouraging firms to reorganise, innovate or reallocate to new markets. The cleansing effect of recessions is also to eliminate those firms that are unable to reorganize or innovate.
if firms could always borrow enough funds to either reorganise their activities or move to new activities and markets, and the same was true for workers trying to relocate from one job to another, the best would be to recommend that governments do not intervene over the business cycle, and instead let markets operate.