Quiz 4 Flashcards
Solow model
understand why some countries grow fast and others not
Production function
Y = F(K,L)
Returns to scale
Constant: increase both K and L by same factor = output multiplied by same factor
Not constant: increase in K only but not L = less output than factor
Constant returns to scale
λ Y = F( λ K, λ L)
-> y = f(k)
2 assumptions of the Solow model
1) always possible to sell the good
2) all of Y goes back to the entrepreneur (secure property rights)
-> income split between consumption and savings
Depreciation of capital stock formula
Kt = (1- δ) Kt-1 + It-1
Propensity to save
people save a fraction of their income
Positive force
propensity to save/investments
-> sf(kt-1)
Negative force
depreciation of capital stock
-> -δk t-1
Convergence
equilibrium, steady state, 0 long-run growth, when 2 curves meet
all growth comes from:
1) rate of technical progress
2) propensity to save
Pb with Solow Model
1) doesn’t work with extractive institutions bc no incentives to save, invest, educate
2) also not made for developing countries
Solow residual
The Solow residual represents all factors that contribute to output growth beyond what can be attributed to increases in capital and labor: technological advancements, improvements in managerial efficiency, institutional changes, etc
-> y = Akα
α
capital intensity
structural change
the idea of fundamental change in the eco
Lewis model
provides a framework for understanding the structural transformation of developing economies, particularly focusing on the transition from traditional agriculture-dominated economies to modern industrial economies
Import substitution strategy
developing countries specialize in exports of primary commodities
Prebish-Singer strategy
price of primary good tends to decrease relative to price of manufactured goods over time
Washington Consensus
set of policies established by International financial institutions (World Bank, IMF)
privatization, trade liberalization, fiscal discipline
loans to developing countries against the implementation of SAPs
current conditions for aid
- precise formula
- 16 criteria
- scores between 1 and 6 by World Bank and country officials
- CPIA (Country Policy and Institutional Assessment)
4 categories of CPIA
- eco management
- structural policies
- policies for social inclusion/equity
- public sector management and institutions
inclusive eco institutions
- secure property rights
- unbiased system of law
- provision of public services that level playing field (education, roads, electricity)
- permit entry of new businesses (access to credit = key constraint)
- allow people to choose their careers
inclusive political institutions
- strong centralized state
- pluralism:
> checks and balances by judiciary
> checks and balances by parliamentary system
> free press
> vibrant civil society
> elections
Country performance rating
CPR = (0.24 * CPIA 1 to 3 + 0.68* CPIA 4 + 0.08 * PPR)
IDA Country Allocation
f(CPR ^3, Pop, GNI Per Capita^-0.125)
Inclusive eco institutions
- secure property rights
- unbiased system of law
- provision of public services that level playing field (education, roads, electricity)
- permit entry of new businesses (access to credit = key constraint)
- allow people to choose their careers
