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- 2. Economic Growth Economic growth is a long-term expansion of the productive potential of the economy. Growth
- 3. Rostow’s Five-Stage Model of Development Rostow's Stages of Growth model is one of the most influential
- 4. Rostow’s Five-Stage Model of Development
- 5. Modernization Theory Linear stages of development
- 6. Economic Growth Growth rate How rapidly real GDP per person grew in the typical year. Growth
- 7. The Variety of Growth Experiences
- 8. Productivity Productivity Quantity of goods and services Produced from each unit of labor input Why productivity
- 9. Productivity Determinants of productivity Physical capital Stock of equipment and structures Used to produce goods and
- 10. Productivity Determinants of productivity Natural resources Inputs into the production of goods and services Provided by
- 11. Additionally, other explanations have highlighted the significant role of non-economic factors. These include institutional economics which
- 12. Solow's Neoclassical Model or Exogenous Growth Model The Sources of Economic Growth Production function Y= AF(K,
- 13. This can be transformed into a linear model by taking natural logs of both sides: ln
- 14. The slope coefficients can be interpreted as elasticities. If (α + β) = 1, we have
- 16. Neoclassical Production Functions The Cobb-Douglas production function is expressed as: Hence, now have y = output
- 17. GDP per worker and k Assume A and L constant (no technology growth or labour force
- 18. Diminishing Returns The neo-classical growth theory of Solow (1956) and Swan (1956) postulates that capital accumulations
- 19. Illustrating the Production Function This figure shows how the amount of capital per worker influences the
- 20. Diminishing Returns If the variable factor of production increases, the output will increase up to a
- 21. Catch-up effect (Convergence) Countries that start off poor tend to grow more rapidly than countries that
- 22. A second approach explains convergence as resulting primarily from cross- country knowledge spillovers. The process of
- 23. World’s ten fastest-growing economies
- 24. What causes the differences in income over time and across countries? The Solow growth model shows
- 25. Investment refers to the expenditure on new plant and equipment, and it causes the capital stock
- 26. Depreciation is the amount of capital that wears out each period ~ 10 percent/year. kt+1 =kt
- 27. Depreciation: δ K Investment: s f (k) Investment, Depreciation, and the Steady state
- 28. The steady-state level of capital K* is the level at which investment equals depreciation, indicating that
- 29. The major accomplishment of the Solow model is the principle of transition dynamics, which states that
- 30. Investment, Depreciation and Output Output: Y Depreciation: δ K Investment: s Y
- 31. Solving Mathematically for the Steady State In the steady state, investment equals depreciation and we can
- 32. Understanding Differences in Growth Rates OECD countries that were relatively poor in 1960 grew quickly while
- 33. Some Things to Notice The farther the economy starts below the steady state level of capital,
- 36. Investment in South Korea and the Philippines, 1950-2000
- 37. Brazil, S. Korea, Philippines Source: Penn World Table 6.1 (http://pwt.econ.upenn.edu/aboutpwt.html)
- 38. Application: Do Economies Converge? Unconditional (Absolute) convergence (α-Convergence) occurs when poor countries will eventually catch up
- 39. Imagine that at the end of their first year, some students have A averages, whereas others
- 40. According to the traditional neoclassical growth theory: Output growth results either from increases in labor, increases
- 41. Endogenous Growth Theory The neo-classical growth theory of Solow (1956) and Swan (1956) postulates that capital
- 42. Endogenous growth states that long-run economic growth is determined by forces that are internal to the
- 43. To introduce endogenous growth, it is necessary to have increasing (or at least non-decreasing) returns to
- 44. The largest difference between these two economic growth models is that the endogenous growth theory argues
- 45. Correlation between Educational Attainment and Growth Rate in Real GDP per Worker
- 46. The AK model The ‘AK model’ is sometimes termed an ‘endogenous growth model’ The model has
- 47. The AK model in a diagram Where, investment (i)=s f(k) and depreciation= δ k
- 48. Endogenous Technology Growth (by Ken Arrow (1962) Suppose that technology depends on past investment (i.e. the
- 49. Assuming A=g(K) is Ken Arrow’s (1962) learning-by-doing paper The intuition is that learning about technology prevents
- 50. No Convergence Neoclassical growth theory predicts: Conditional convergence for economies with equal rates of saving and
- 51. Consumption and Output Paths of the Rich and Poor Countries
- 52. Convergence Robert Barro tested these competing theories, and found that: Countries with higher levels of investment
- 53. Transformation of the Korean Economy (1945-2005)
- 54. Policy Choice and Quality of Institutions Matter: The Korean Experiment Source: Aye M. Alemu (2015)
- 55. Flying geese’ pattern of economic development in East Asia The phrase “flying geese pattern of development”
- 56. Japan succeeded first in modernizing its economy during the latter half of the 19th century. Despite
- 57. Structural Transformation in East Asia
- 58. Are natural resources a limit to growth? Argument Natural resources - will eventually limit how much
- 59. Are natural resources a limit to growth? Technological progress Often yields ways to avoid these limits
- 60. Are natural resources a limit to growth? Prices of natural resources Scarcity - reflected in market
- 61. Saving and Investment Raise future productivity Invest more current resources in the production of capital. Trade-off
- 62. Higher savings rate Fewer resources – used to make consumption goods More resources – to make
- 63. Investment from Abroad Investment from abroad Another way for a country to invest in new capital
- 64. Investment from Abroad Benefits from investment Some flow back to the foreign capital owners. Increase the
- 65. Investment from Abroad World Bank Encourages flow of capital to poor countries Funds from world’s advanced
- 66. Investment from Abroad World Bank and the International Monetary Fund Set up after World War II
- 67. Education Education Investment in human capital Gap between wages of educated and uneducated workers Opportunity cost:
- 68. Health and Nutrition Human capital Education Expenditures that lead to a healthier population Healthier workers More
- 69. Health and Nutrition Right investments in the health of the population Increase productivity Raise living standards
- 70. Health and Nutrition Vicious circle in poor countries Poor countries are poor Because their populations are
- 71. Health and Nutrition Virtuous circle Policies that lead to more rapid economic growth Would naturally improve
- 72. Property Rights & Political Stability To foster economic growth Protect property rights Ability of people to
- 73. Property Rights & Political Stability Lack of property rights Major problem Contracts are hard to enforce
- 74. Property Rights & Political Stability Political instability A threat to property rights Revolutions and coups Revolutionary
- 75. Free Trade Inward-oriented policies Avoid interaction with the rest of the world Infant-industry argument Tariffs Other
- 76. Free Trade Outward-oriented policies Integrate into the world economy International trade in goods and services Economic
- 77. Research and Development Knowledge – public good Government–encourages research and development Farming methods Aerospace research (Air
- 78. Population Growth Large population More workers to produce goods and services Larger total output of goods
- 79. Population Growth Diluting the capital stock High population growth Spread the capital stock more thinly Lower
- 80. Population Growth Promoting technological progress World population growth Engine for technological progress and economic prosperity More
- 81. Summary International differences in income per person can be attributed to either: differences in the factors
- 82. Summary The Solow growth model has emphasized the importance of savings or investment ratio as the
- 83. Technological progress, though important in the long-run, is regarded as exogenous to the economic system. The
- 84. Investment, Depreciation and Output Output: Y Depreciation: δ K Investment: s Y
- 85. The Endogenous growth theory believe that human capital and innovation capacity are the main sources of
- 86. The AK model in a diagram
- 87. Generally, the following are growth drivers: Growth in physical capital stock (capital deepening) Growth in the
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