Models Of Long-run Growth

Question 1

3 key growth models

Answer 1

Classical
Neoclassical
New growth

Question 2

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

Question 3

Classical growth models (2)

Answer 3

Malthusian
Smithian

Question 4

Neoclassical growth models (2)

Answer 4

Lewis
Solow (exogenous growth)

Question 5

New growth models (4)

Answer 5

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

Question 6

Malthusian model features (5)

Answer 6

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

Question 7

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

3 reasons why Malthus failed to predict growth

Answer 7

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.

Question 8

What did Malthus fail to foresee (3)

Answer 8

Gains in labour productivity (specialisation+factor accumulation)

Changes in market for children

Failed to foresee tech change

Question 9

Smithian growth main feature

Answer 9

Specialisation central to growth

Question 10

Lewis model key features

Answer 10

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.

Question 11

Solow-Swan/exogenous growth model features (2)

Answer 11

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)

Question 12

Limitations of exogenous growth models (Solow)

Answer 12

Endogenous technological change (R&D)

Human and physical capital virtuous circles

Externalities and spillovers

Question 13

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

Answer 13

Technology is endogenous, determined by monopolistic firms to innovate.

Innovations are non rivalrous requiring monopoly profits

Question 14

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

Answer 14

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)

Question 15

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

Answer 15

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

Question 16

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

Answer 16

Whether income actually leads to more children

-the demographic transition

Question 17

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

Answer 17

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)

Question 18

Why Malthus’ theory regarding children was wrong

Answer 18

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)

Question 19

2 models for children

Answer 19

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

Question 20

QQ model features

Answer 20

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.

Question 21

Unified growth theory (growth is unified)

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

Answer 21

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

Question 22

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

Answer 22

Tropics theory
Germs theory
Crops theory

Question 23

Tropics theory (one of 3 NIE views to growth)

Answer 23

Distance to equator plays a key role.

Determined settlement patterns of Europeans.

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

Question 24

Germs theory (Acemoglu)

Answer 24

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)

Question 25

The general institutional view model

Answer 25

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

Question 26

Crops theory (Engerman and Sokoloff)

Answer 26

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.

Question 27

Criticisms of institutional view (4)

Answer 27

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.

Question 28

Geography view

Answer 28

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

Question 29

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

Answer 29

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)

Question 30

Transportation costs and locational agglomeration decisions. (Part of NEG model)

Shipping costs high vs intermediate vs low

Answer 30

If shipping costs high, produce in both

Intermediate shipping costs, produce in core

Shipping costs low, produce in periphery.

Question 31

Second Geography view: (Sachs) looks at 2features impacting growth.

And Schedvin looks at 1 more feature

Answer 31

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)

Question 32

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

Question 33

Geography- NEG - things they consider (5)

Answer 33

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)

Question 34

Dutch disease

Answer 34

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

Question 35

Prebisch singer hypothesis

Answer 35

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.

Question 36

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

Answer 36

Malaria transmission (affected by ecological conditions) directly impacts GDP, after controlling for quality of institutions.

“Economic development is more complex than institutional shortcomings”