Models Of Long-run Growth Flashcards by lew lee

3 key growth models

Classical
Neoclassical
New growth

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Classical
Neoclassical
New growth
Malthusian features
Why is population growth then halted?
Why Malthus failed (3)
Smithian model features
Lewis model features
Solow-swan features
Limitations of exogenous growth models (3)
Endogenous tech change
Human and physical capital virtuous circles
Externalities and spillovers

Demographic transition stages (5)
Malthus’s theory relied on… and why it failed.
Becker’s QQ model features
Unified growth theory
Deep determinants of LR growth
Institutional view
Germs theory

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Classical growth models (2)

Malthusian
Smithian

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Neoclassical growth models (2)

Lewis
Solow (exogenous growth)

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New growth models (4)

Endogenous growth models
Demography
New institutional economics and new economic geography.

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Malthusian model features (5)

Population grows geometrically, food supply grows arithmetically.

Fixed supply of land

Diminishing marginal returns to labour

Increase in income per capita results in population growth (MORE INCOME MORE KIDS)

Population growth halted by pos and prev checks

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Malthus was broadly correct about pre-industrial world. But….

3 reasons why Malthus failed to predict growth

Wrong about population growth eating up income growth (as it doesn’t actually happen, failed to foresee gains in labour productivity)

Wrong about income always leading to more children. (Market for children)

Wrong about shocks to income being intermittent, they are sustained.

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What did Malthus fail to foresee (3)

Gains in labour productivity (specialisation+factor accumulation)

Changes in market for children

Failed to foresee tech change

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Smithian growth main feature

Specialisation central to growth

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Lewis model key features

Economy split into agriculture and industrial

Industrial use MPL, agricultural APL.

Cheap labour moves freely to industrial sector

Industrial earn profits from low cost labour MPL. Profits then reinvested.

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Solow-Swan/exogenous growth model features (2)

Capital accumulation accelerates initially causing rapid growth. Growth then slows and becomes steady, at this point, technological change then determines growth (TECH CHANGE EXOGENOUS)

Diminishing marginal returns for FOP causes the slowdown (Malthus was DMR for labour)

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Limitations of exogenous growth models (Solow)

Endogenous technological change (R&D)

Human and physical capital virtuous circles

Externalities and spillovers

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First limitation of exogenous growth models: Endogenous technological change (r&d) characteristics

Technology is endogenous, determined by monopolistic firms to innovate.

Innovations are non rivalrous requiring monopoly profits

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Human and physical capital virtuous circles characteristics. (2nd limitation to exogenous growth models (Solow))

Diminishing returns exist (as mentioned already in Solow model)

Investment in human and physical capital can produce unconstrained growth, remove stability (stability is needed for technological growth)

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Externalities and spillovers (3rd limitation of exogenous models) (1)

Technology is a function of capital: Spillovers from capital investment create unconstrained growth (reduce stability required for Solovian (tech) growth)

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What do Demography models review and what is it known as?

Whether income actually leads to more children

-the demographic transition

5 stages of demographic transition and what it means for growth.

1.High birth rate, high death rate
2.High birth rate, moderate death rate
3.Moderate birth rate, low death rate
4.Low birth rate, low death rate
5.Very low birth rate, low death rate

(High high to v low v low)
So population stabilises. Growth becomes driven by technology and productivity improvements (which malthus failed to foresee)

Why Malthus’ theory regarding children was wrong

His theory relied on a positive YED for children, but many households have a negative YED.

This helps to explain why long term growth can be sustained. (Income up but less kids actually)

2 models for children

Becker’s Quantity-Quality model (QQ model)
Galor’s Unified Growth Theory

QQ model features

Utility derived from child quantity and quality.

Low YED of child quantity (Quantity-inferior good)
High YED of child quality (Quality-normal good)

Rich people spend more on quality but reduce quantity of children. Explains why population growth doesn’t actually eat up income growth.

Unified growth theory (growth is unified)

Explain why benefits of technological change isn’t offset by population growth (against Malthus)

Technological change is a function of both population and education. (QQ model means as population increases they substitute quantity for quality: parents invest in education)

Education is also a function of technological change too

Institutional view of growth model: 3 theories of New Institutional Economics (NIE)

Tropics theory
Germs theory
Crops theory

Tropics theory (one of 3 NIE views to growth)

Distance to equator plays a key role.

Determined settlement patterns of Europeans.

Other continents didn’t get European institutions as migrants avoided tropics.

Germs theory (Acemoglu)

Germs determine the European settler mortality rate

Good institutions were set up in low mortality rates as a result. (E.g better property rights in low mortality areas)

Bad set up in higher mortality i.e Asia Africa etc.

(SAME AS COLONIAL ORIGINS OF COMPARATIVE DEVELOPMENT, IN ACCIDENTAL APPROACH TO INSTITUTIONS)

The general institutional view model

Settler mortality> European Settlement> Past Institutions> Current institutions> GDP per capita

Crops theory (Engerman and Sokoloff)

Land determines European production and income inequality as a result. Good institutions set up in low population density. Bad institutions set up in high population density i.e Asia Basically, crops theory suggests GDP distribution depends on initial state of geography.

Criticisms of institutional view (4)

Institutions improving development may be considered tautological. (Circular argument) GDP growth actually improves institutions more than vice versa Big difference explained fairly well but not subtler differences between countries e.g Kenya v Ghana Geography view matters more - Malaria transmission (affected by ecological conditions) directly impacts GDP, after controlling for quality of institutions.

Geography view

Argues geography matters for efficiency in production. So, Neoclassical argued no gaps in efficiency, NIE say institutions create gaps that limit long run growth But NEG provide geographical wedges that explain growth differences

New economic geography model features (3) and implications of NEG

Factors not perfectly mobile Increase returns to scale in long run possible Transaction costs high. Implications: Location matters-agglomeration economies e.g Silicon Valley for tech Neoclassical convergence may be limited by geography (Think of it as adding space into neoclassical model, which creates transport costs for import/export)

Transportation costs and locational agglomeration decisions. (Part of NEG model) Shipping costs high vs intermediate vs low

If shipping costs high, produce in both Intermediate shipping costs, produce in core Shipping costs low, produce in periphery.

Second Geography view: (Sachs) looks at 2features impacting growth. And Schedvin looks at 1 more feature

Sachs Latitude determining ecological conditions e.g social fertility Landlocked (limits ability to trade+dependence on neighbours infrastructure + relations with them: not landlocked=higher GDP) Schedvins: Direct effect of crops esp wheat. (wheat producers did better than cash crops e.g cotton cocoa)

China stuff (Background stuff of west overtaking china) Revisionist view (late)- e.g because of war for 20 years while west was developing. Grain wages Traditionalist view-early (Europe overtook Asia early due to its institutions.) Silver wages, NW Europe already ahead 2 Quantitive approaches to assess opposing views: Wages and income Wages- what do revisionist look at vs traditionalists Income-revisionists vs traditionalists Graph shows India and China lose grain wages. Around 1700 (divergence stage) Traditionalists-2nd graph shows silver wages even in 1550 was lower than England, TRADITIONALIST WAY EARLY THAN DIVERGENCE TIME Nominal wage evidence (silver) supports an early great divergence, real grain wages do not support an early great divergence

Geography- NEG - things they consider (5)

Transport costs Market potential-gains in LR Distance to equator (crops-Schedvin-countries with ideal conditions for wheat did better. Note: also prevalent in NIE-Tropics theory, equator determines institutions provided) Landlocked (Sachs) Resource curse (Dutch disease and prebisch singer)

Dutch disease

Countries develop a specific sector, appreciates currency from its demand, negatively impacting other exports as they become more expensive

Prebisch singer hypothesis

Primary products have inelastic YED. Unresponsive to changes in income. So when world incomes rise, demand doesn’t change for primary products too much. For manufactured goods, demand increases more, increasing prices, meaning imports for primary product dependent countries are more expensive, so afford less. E.g cannot afford capital to invest. Links to NEG as geography determines primary product dependency.

Sachs example of geography and ecological variables determining growth more than institutions.

Malaria transmission (affected by ecological conditions) directly impacts GDP, after controlling for quality of institutions. “Economic development is more complex than institutional shortcomings”