W2 - Review of Key concepts and models Flashcards
What are the main models of long-run growth?
- The Neoclassical (Solow-Swan) growth model
- Endogenous growth model
What is the role of government policy?
To induce growth in primary and secondary sources of growth
What does higher productivity or better technology do to the output function and why?
It shifts it up as an increase in productivity (A). The equation is y = Af(k) and an increase in TFP raises output per worker.
Where does the steady state occur?
Where savings are equal to required investment
What happens when the savings rate increases?
When the savings rate is higher, increases investment, higher capital accumulation and therefore higher income and a higher steady state
How do views on population growth different between exogenous and endogenous growth models?
In the exogenous model, population growth is said to reduce capital per workers and therefore decrease income per capita (Malthus, One-child policy).
Endogenous growth models say the opposite and argue that with a greater amount of population, you will have more innovative people and therefore lead to more technological progress
How do endogenous models of growth differ to exogenous growth models?
They allow the growth rate of technology to be influence by other variables such as the amount of investment in R&D
How do endogenous growth models change the concept of cpaital?
It includes human capital
How does the inclusion of human capital to endogenous growth models alter the results?
It can give rise to models without diminishing returns
What is purchasing power parity?
A theory relating changes in nominal exchange rates to relative inflation rates across countries and has basis in the Law of One Price (LOOP) - meaning that identical goods must sell for the same price (net of transaction costs) irrespective of the location
Where does LOOP hold?
For internationall traded homogenous goods such as currency, gold, oil, shares, etc
Why do we use the GDP measure adjusted for purchasing power?
Prices are different in different countries and are also in different currency units. Even after converting to the common currency unit, one has to take into account different prices for similar goods.
Name some countries that have capped real exchange rates in the past to maintain international competitiveness?
China, South Korea and Japan
What are three ways using the equation for real exchange rates that international competitiveness can improve?
A decrease in the nominal exchange rate
A decrease in the domestic price level
An increase in the foreign price level
What is the meaning of ‘import substitution’ in industrialisation?
Replacing previously imported goods/ services with domestically produced goods or services
How is import substitution carried out?
Through tariffs and subsidies (Protectionism) to support infant industries
What is the weakness of import substitution?
It might not be your comparative advantage. This is a problem because it is hard to export when you are not competitive
Which countries adopted ISI successfully?
China and South Korea
Where did ISI not work and why?
Thailand tried to do it with planes but it was not their comparative advantage. It also failed in South America.
What conclusions should be drawn on ISI?
It is good in theory but can often prove to be much harder in reality to chose the right things to export
Some critics and commentators argue that economic growth inevitably worsens income distribution, and hence pursuing growth as a policy objective is not a good idea. Is this criticism borne out by the Asian growth experience or historical data?
No not really, even if income inequality worsened, living standards increased for everyone pulling millions of people out of absolute poverty
Define renk seeking?
Effort to increase one’s share of existing wealth without creating new wealth (zero sum game)
Where was rent seeking present in Asia?
Crony capitalism
