Physical Capital and Growth Flashcards
4 Stages to derive HD
1 - consumption vs savings decision
2- all savings invested into capital
3 - capital used to produce goods
4- derive HD equation
Issues with HD model
- assumes production uses capital only
- assumes linear production function with constant RTS
- Assumes necessary government infrastructure exists so that savings are always converted into investment and investment is always transferred into capital
What does HD model predict about income?
As the rich can afford to save more, there will be extreme divergence in income
Examples of lower middle and upper middle income countries and their thresholds
Lower ($1026 - 4035)
Kenya, Ghana, India
Upper (4 - 12475)
Cuba, Equador
Proximate determinants of poverty
- Lack of Physical Capital
- Education
- Health
- Population
- Lack of access to credit and inability to save
Fundamental causes of poverty
- institutions, governments, leaders
- culture (preference for leisure, trust)
- geography
- climate
- history
how much of the world below average income per head and what is it?
80%, $8630
How does using market or PPP exchange rate differ estimates of output?
Market exchange rate underestimates output of developing countries as does not take into account their nontraded goods
Difference in richest and poorest country?
Intrastate in US?
US and Sierra Leone - 76x
2:1
What makes up the human development index?
Life expectancy
Education (adult literacy, school enrollment)
per capita GDP
4 classic approaches to economic development
Linear stages of growth
Theories and Patterns of Structural Change
International Dependance Revolution
Neoclassical freemarket counter revolution
Rostow stages of growth
Traditional society
Pre conditions for take off (5-10% savings rate)
Take off (20% saving, rapid industrial growth)
Drive to maturity
Age of mass consumption
3 criticisms of Rostow
- only applicable to period studied
- fails to address other factors outside production eg. education, governments
- predicts sustainable growth inevitable as long as savings rate sufficient
what is the financing gap and where does it come from?
HD model - assume k is fixed so savings drives growth.
poor too poor to save, fill gap with soft loans and aid
Easterly’s 3 tests
Does foreign aid lead to investment?
does investment lead to immediate growth?
is investment necessary but not sufficient?
What years did easterly look at for his 3 tests?
1965 - 1995
Easterly - Does foreign aid lead to invest?
no relationship - only 17/88 countries with positive and significant relationship
- no incentives to invest
- giving money does not change this
Easterly - does investment lead to immediate growth?
no relationship between avarage investment over 4 years and 4 years after
significant positive relationship in 4 of 138 economies
Is investment necessary but not sufficient?
not even necessary - looks at high growth countries with more than 7% growth and none were preceded by any necessary amount of investment
3 stages of Lewis model
- two sector set up
- structural change and industrialisation
- process of structural transformation (after surplus labour exhausted)
implications of Lewis model
- capital accumulation in modern sector as all profis invested
- capital increases output and employment
- changes homogenous, savings driven perception to 2 sector one
Assumptions of lewis model
- competitive labour market in city
- surplus in aggriculture
- rate of transfer of labour proportional to capital accumulation
- constant real wages until surplus labour exhausted (calculated at premium over agriculture wage)
Whos analysis was structural change and development patterns analysis based on?
Hollis B. Chenary
main thought of structural change and development pattern analysis?
investment is necessary but not sufficient
According to SC&DPA what else is needed for development?
international trade, consumer demand change for complex goods, growth in cities, decline in family sizes, human and physical capital accumulation
What does SC&DPA say about speed of growth today?
access to internatinal market and external credit means today’s developing economies can experience much more rapid growth than previously
What does the solow model predict?
higher savings leads to higher growth if everything else the same
growth = 0 in steady state
only growth is transitional growth
conditional covergence - if have same savings rate, the poor catch up
Capital flows from rich to poor countries as have higher MPK
Is Solow convergence observed in reality?
- Baumol Convergence study - suggests some degree but biased sample as all 16 countries had developed by 20th century and converged ex post
- Lant Pritchard on convergence - if we look back far enough, everyone the same and since 1820s had massive divergence
What does easterly say about capital that contradicts Solow model?
Solow model says capital is only source of growth, Easterly says labour can subistitute in short to medium term
What happens if you introduce savings endogenously?
have two savings rate which leads to two different steady states - rich and ppor
