Theories of Growth Flashcards
neoclassical economic growth framework
how different inputs (types of capital into production) matter
how technology and organisation of production matters
how international economic conditions matter
framework of the model of economic production
goal to explain income per capita (important determinator of living standards)
capital stock (physical and human capital stock) k
- investments in capital that cost us something today but make us more productive in the future
technology A
- way we organise capital and production to be productive
functional form of economic production
y = f(A,k) = Ak^alpha
concave functional form (from the power)
diminishing marginal returns
- as k increases, y increases as well but at a decreasing rate
- returns to capital investment should be highest in poor countries, ceteris paribus
exogenous factors that drive growth
increasing savings
- saving more to sustain a higher level of capital
increasing technology
- more advantages than boosting the savings rate since technology is not bounded
in the long run, technology drives development, change and improvements
- savings can’t get you to sustained growth as it is bounded
decreasing depreciation
- capital lasts longer and you can accumulate more
sources of long-run economic growth
technological improvements as key
key assumptions in the model
closed economy, so all savings go to investment
fraction s of output is saved
fraction d of capital is lost/worn out in each period from depreciation
steady state
same stable amount of capital per capita across periods
what happens if A is equal across countries?
differences driven by baseline capital intensity
systematically higher returns to investment in poorer countries, with capital flowing from rich to poor countries
- faster growth in poor countries than rich
we do not see these patterns
- technology A is not equalised across countries
- over 80% of private investment flowed to the richest 20% of population in the 1990s
- poorest 20% got 1% of these flows
evidence that k factors (capital) alone can’t explain Africa’s disappointing performance
massive increases in education (school enrolment, literacy) in the past 50 years but growth has been close to 0
- time lags but investments haven’t paid off more yet
large infusions of international capital (k) as foreign aid which have not produced sustained growth in Africa
- hasn’t made SSA rich even though it’s been worth trillions over years
Africa vs. Asia (internal reforms and external investments)
similar levels of development in 1980 but if A is higher in Asia than Africa, marginal return to capital is higher
- more productive investments in Asia which leads to a shift in investment there (because China opened up, private ownership, property rights reforms)
internal reforms reflected in A enable less developed countries to harness more external resources
- if there is a limited pool of external capital, generates a winner take all dynamic
- good returns crowd out other places
why might the economic rise of Asia benefit Africa?
increases the total amount of foreign investment capital
foreign investment outflows from China soared since 2000
- big increases in FDI and foreign investment
during this period, FDI into Africa increasing
