Lecture 14 - Explaining Growth Flashcards
Factors that influence growth according to Solow model (3)
And which one influences living standards?
K accumulation
Population change (a fall in n increases k)
Technological progress
(Only tech progress creates rising living standards, if labour augmenting type E in the model i.e increase productivity of labour, or driven by human capital growth)
Remember MPL schedule - anything that increase labour productivity increase real wage (and living standards)
When does the real rental price of capital (R/P) stay constant? and why?
Only if labour-augmenting technological progress takes place.
LA tech progress means workers productivity increases, thus increasing MPL. Correspondingly, MPK also increases since extra capital can be combined with more productive labour.
And MPK = R/P. So if both relative MPL and MPK increase, real rental price is constant.
What does Solow model get right/wrong
Right - evidence from US
Tech progress increases living standards
Real rental price remains constant if we have labour augmenting tech progress.
Wrong
Solow model predicts convergence.
Why does the Solow model predict the convergence of growth rates
Solow model predicts that countries will converge if the steady state is the same.
(Remember in economic growth lecture we noticed convergence in EU developed countries, but across the world no)
We have not seen a convergence (4)
Different model parameters e.g savings rate, population growth. Higher savings in rich vs low in poor: higher means higher k. Countries with high n, lower k
Different human capital (tends lower in poor countries)
Different capital efficiency (cannot use capital well)
Different technology (rich worlds develop tech better and so remain better)
Is it valid to say firms in rich countries are more efficient compared to poor countries?
(hint… correl vs causation)
There is positive correlation between efficiency and capital accumulation (human & physical)
However unsure of causality.
Do efficient firms engage more in capital accumulation and is labour used required to have a higher human capital? (idea efficiency driving physical and human capital accumulation)
Or does better physical and human capital accumulation generate higher efficiency? Pos externalities from pc/hc i.e knowledge transfers>efficiency.
Also there can be a third variable such as quality of institutions influencing efficiency and capital accumulation.
Idea of efficiency causing PC/HC accumulation
Efficient firms engage more in K accumulation, and demand labourers to have a human capital
Idea of PC/HC accumulation causing efficiency gains
PC/HC accumulation has positive externalities.
E.g firms/labour learn from each other (knowledge transfers) on how to use PC/HC more efficiently.
Growth accounting formula page 6 to find Solow Residual
(I.e how to find growth rate of technical progress / TFP)
- Use CD function
Y = AN to the v K to the 1-v
Take logs to find change in each.
ΔY/Y = vΔN/N + (1-V)ΔK/K + ΔΑ/A
Rearrange to make ΔA/A (growth rate of tech progress)
Growth accounting including human capital (change in growth equation that includes hc)
- Use CD function that includes human capital
Y = A HN to the v K 1-v - Put in PW terms (divide by N)
y = A H to the v k to the 1-v
Where y=Y/N k=K/N
- Take logs to get the change in…
Δy/y = ΔA/A + v(ΔH/H) + (1-v)(Δk/k)
Mankiw finds TFP and output growth has fallen over past 45 years… Why? (4)
- How does a real business cycle support the solow residual model in the short run?
1.Ignores quality of products. Only shows output growth omits quality changing. TFP may have contributed to quality more as opposed to output levels.
2.Lower labour quality (e.g low HC)
3.Ideas harder to produce (as we saw in Bloom, more in industry but idea productivity z is falling)
4. HH richer so consume differently.
- Solow residual is TFP growth. Technology shocks influence TFP which correspondingly influences short run variations in output growth
Role of finanial sector in the innovation process
Financial sector circulates funds from savers to firms to innovate.
They can also faciliate trading of ideas to ensure efficient allocation (installing a market for patents)
How can financial markets drive innovation
They can do this through microfinance, small business funding, venture capital
Evaluation point of financial markets influencing growth
Speculative investment has risks which can lead to resource misallocation e.g dotcom bubble
Issue for policy makers and provide examples (2)
Ideas have public good component, but mainly comes from private sector. This raises issue of overproduction/underproduction, reducing social welfare overall.
Examples: If too many people are innovating/using ideas, people may avoid sharing.
Time and resources may be diverted to suppressing new ideas or punishing those who spread them.
