Week 5 - History, expectations, traps and multiple equilibria 1 Flashcards
Why is discussing the proximate causes of underdevelopment e.g. low TFP, low Investment, not ideal?
Because these are not root causes of underdevelopment, they are just as much a symptom as they are a cause
What is underdevelopment more likely to be as a result of?
Not as a failure of socio-cultural values or some economic parameter, but as an interactive outcome in a system, perhaps precipitated by some historical accident or inertia and path dependence.
More specifically, what can we attribute differences in the steady state determinants to?
Intrinsic differences in the willingness or ability to save or to procreate.
Why did we adopt the QWERTY keyboard?
To slow down mechanical writers so their typewriters won’t get jammed.
Even though other keyboards are more efficient, why do we still use the QWERTY keyboard? (2)
- For a single firm it does not make sense to switch to a different keyboard as retraining typists would be too high
- Why would typing schools teach a different keyboard which no one uses?
What is the key issue made apparent by the QWERTY keyboard example.
If everyone switched their keyboard, there would be substantial efficiency gains, but no one wants to switch. Return to switching depends on what everyone else does.
What is complementarity?
When the number of adopters of a system depends positively on other adopters.
What kind of externality does using a QWERTY keyboard exhibit?
Positive externality
Where are the equilibria on the QWERTY/Dvorak cost diagram. State whether they are stable or not
Everyone uses QWERTY - stable
Everyone uses Dvorak - stable
50/50 - unstable
What are some other examples of complementarities?
Social media: instagram, twitter, airbnb
Infrastructure with a fixed cost component
Evading taxes
How does the Romer AK model exhbit complementarity?
An individual firm is more likely to invest if future productivity is high, which depends on the investment of all other firms. Therefore investment is more profitable if more other firms invest.
What are the two stable equilibria in the complementarities in investment diagram?
When everyone invests
When no one invests
True or False: Complementarities can lead to an economy to be trapped in a bad equilibrium
True - a better equilibrium is available if all agents appropriately coordinated their actions.
How can underdevelopment by underinvestment be explained as a coordination failure?
A better equilibrium is available if only all agents could appropriately coordinate their actions. But no one invests because everyone thinks no one will invest.
What is demand complementarity?
If one sector e.g. steel, is doing very well, then they want more coal to increase production of steel so the coal sector would experience an increase in demand. Many sectors of the economy are linked - they can all bring each other up or pull each other down