Lecture 4 - The era of stagnation Flashcards
What are some reasonable assumptions that can be made about mortality and fertility as a result of higher y?
It is reasonable to assume that higher y means:
- lower mortality
- higher fertility
What verbal model can we deduce about GDP per capita and population in a traditional economy?
The higher y is, the higher n is
Derive and state the mathematical model used in place of the verbal model ‘The higher y is, the higher n is’
- n=n(y) where n(y) can be any function that looks like an increasing function that tends to a limit graphically
- Sub this into the previous model for growth in GDP per capita giving:
g = g^A - βn(y)
State the fundamental equation of growth of a traditional economy
g = g^A - βn(y)
What is the name of the equation given by g = g^A - βn(y)?
The fundamental equation of growth of a traditional economy
What is the main conclusion that can be drawn from the fundamental equation of growth of a traditional economy?
As long as g^A>βn(y), y and βn(y) will continue to increase year on year so g^A=βn(y) must be reached at some point
Say that g^A = βn(y) in 1625, what will be the case in 1626 and so on?
It will still be g^A = βn(y) in 1626, 1627 and forever after
Explain the significance of the result g^A = βn(y) in a traditional economy and what it tells us
If there is positive growth in a traditional economy, this will slow down over time, eventually reaching zero. If there is negative
growth in a traditional economy, this will slow down over time (become less negative), eventually reaching zero. If there is no
growth in a traditional economy, this will persist indefinitely. In other words, a traditional economy must converge to a situation
in which it is g^A = βn(y),
so that it is g = 0.
What situation must a traditional economy always converge to?
A traditional economy must always converge to a situation in which it is g^A=βn(y) so that g=0
If a traditional economy does not feature growth then what is the level of GDP per capita in that economy?
If a traditional economy does not feature growth then it should feature a level of GDP per capita that is roughly constant over time
What is the level of constant GDP per capita in a traditional economy?
In the long run y must converge to an equilibrium value y* such that:
g^A = βn(y) or g^A/β = n(y)
In summary, what does this model tell us about a traditional economy?
- In summary, no matter what the value of g^A there cannot sustained economic growth in a traditional economy
- In the long run, GDP per capita must be constant and equal to y*
What is the name of the model used to display a traditional economy and how does this link to similar ideas?
- This model used to display traditional economies is called the Malthusian model
- Traditional economies are also known as Malthusian economies
- The era of stagnation was also known as the Malthusian era
- The fact that no sustained economic growth was possible in the Era of stagnation was known as the Malthusian trap
According to the Malthusian model, will GDP per capita be the same across different countries?
Not necessarily, if n(y) is higher in one country than in another, the country with the higher n(y) will have a lower y*
According to the Malthusian model, will GDP per capita remain constant over time?
- Not necessarily, for example y can fluctuate around its long term equilibrium level y*
- Eg. A temporary rises in g^A will lead to g^A>βn(y) leading to an increase in y. As population growth picks up g^A falls back to the initial level and it is then g^A<βn(y) causing y to decrease until the long-run level y* is restored