Physical Capital and Growth

Question 1

4 Stages to derive HD

Answer 1

1 - consumption vs savings decision
2- all savings invested into capital
3 - capital used to produce goods
4- derive HD equation

Question 2

Issues with HD model

Answer 2

• 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

Question 3

What does HD model predict about income?

Answer 3

As the rich can afford to save more, there will be extreme divergence in income

Question 4

Examples of lower middle and upper middle income countries and their thresholds

Answer 4

Lower ($1026 - 4035)
Kenya, Ghana, India
Upper (4 - 12475)
Cuba, Equador

Question 5

Proximate determinants of poverty

Answer 5

• Lack of Physical Capital
• Education
• Health
• Population
• Lack of access to credit and inability to save

Question 6

Fundamental causes of poverty

Answer 6

• institutions, governments, leaders
• culture (preference for leisure, trust)
• geography
• climate
• history

Question 7

how much of the world below average income per head and what is it?

Answer 7

80%, $8630

Question 8

How does using market or PPP exchange rate differ estimates of output?

Answer 8

Market exchange rate underestimates output of developing countries as does not take into account their nontraded goods

Question 9

Difference in richest and poorest country?

Intrastate in US?

Answer 9

US and Sierra Leone - 76x

2:1

Question 10

What makes up the human development index?

Answer 10

Life expectancy
Education (adult literacy, school enrollment)
per capita GDP

Question 11

4 classic approaches to economic development

Answer 11

Linear stages of growth
Theories and Patterns of Structural Change
International Dependance Revolution
Neoclassical freemarket counter revolution

Question 12

Rostow stages of growth

Answer 12

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

Question 13

3 criticisms of Rostow

Answer 13

• 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

Question 14

what is the financing gap and where does it come from?

Answer 14

HD model - assume k is fixed so savings drives growth.

poor too poor to save, fill gap with soft loans and aid

Question 15

Easterly’s 3 tests

Answer 15

Does foreign aid lead to investment?
does investment lead to immediate growth?
is investment necessary but not sufficient?

Question 16

What years did easterly look at for his 3 tests?

Answer 16

1965 - 1995

Question 17

Easterly - Does foreign aid lead to invest?

Answer 17

no relationship - only 17/88 countries with positive and significant relationship

• no incentives to invest
• giving money does not change this

Question 18

Easterly - does investment lead to immediate growth?

Answer 18

no relationship between avarage investment over 4 years and 4 years after
significant positive relationship in 4 of 138 economies

Question 19

Is investment necessary but not sufficient?

Answer 19

not even necessary - looks at high growth countries with more than 7% growth and none were preceded by any necessary amount of investment

Question 20

3 stages of Lewis model

Answer 20

1. two sector set up
2. structural change and industrialisation
3. process of structural transformation (after surplus labour exhausted)

Question 21

implications of Lewis model

Answer 21

• capital accumulation in modern sector as all profis invested
• capital increases output and employment
• changes homogenous, savings driven perception to 2 sector one

Question 22

Assumptions of lewis model

Answer 22

• 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)

Question 23

Whos analysis was structural change and development patterns analysis based on?

Answer 23

Hollis B. Chenary

Question 24

main thought of structural change and development pattern analysis?

Answer 24

investment is necessary but not sufficient

Question 25

According to SC&DPA what else is needed for development?

Answer 25

international trade, consumer demand change for complex goods, growth in cities, decline in family sizes, human and physical capital accumulation

Question 26

What does SC&DPA say about speed of growth today?

Answer 26

access to internatinal market and external credit means today’s developing economies can experience much more rapid growth than previously

Question 27

What does the solow model predict?

Answer 27

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

Question 28

Is Solow convergence observed in reality?

Answer 28

• 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

Question 29

What does easterly say about capital that contradicts Solow model?

Answer 29

Solow model says capital is only source of growth, Easterly says labour can subistitute in short to medium term

Question 30

What happens if you introduce savings endogenously?

Answer 30

have two savings rate which leads to two different steady states - rich and ppor