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CONTENTS
1 INTRODUCTION: THE FACTS OF ECONOMIC GROWTH 1
THE DATA OF GROWTH AND DEVELOPMENT 3 1.2 OTHER “STYLIZED FACTS” 13
THE REMAINDER OF THIS BOOK 17
THE BASIC SOLOW MODEL 22
EVALUATING THE SOLOW MODEL 43
GROWTH ACCOUNTING, THE PRODUCTIVITY SLOWDOWN,
3 EMPIRICAL APPLICATIONS OF NEOCLASSICAL GROWTH MODELS 54
THE EVOLUTION OF INCOME DISTRIBUTION 72 EXERCISES 75
WHAT IS TECHNOLOGY? 80 4.2 THE ECONOMICS OF IDEAS 81
INTELLECTUAL PROPERTY RIGHTS AND THE INDUSTRIAL REVOLUTION 87
POPULATION AND IDEAS 90 4.5 DATA ON IDEAS 91
SUMMARY 95 EXERCISES 96
THE BASIC ELEMENTS OF THE ROMER MODEL 98 .1 Growth in the Romer Model 103
THE ECONOMICS OF THE ROMER MODEL 111 .1 The Final-Goods Sector 112
GROWTH THROUGH CREATIVE DESTRUCTION 119 .1 The Basic Elements of the Schumpeterian Model 120
THE ECONOMICS OF SCHUMPETERIAN GROWTH 124 .1 The Final-Goods Sector 125
SUMMARY 135
6 A SIMPLE MODEL OF GROWTH AND DEVELOPMENT 140
THE BASIC MODEL 140
STEADY-STATE ANALYSIS 143 6.3 TECHNOLOGY TRANSFER 146
UNDERSTANDING DIFFERENCES IN GROWTH RATES 152 EXERCISES 155
7 SOCIAL INFRASTRUCTURE AND LONG-RUN ECONOMIC PERFORMANCE 157
A BUSINESS INVESTMENT PROBLEM 158 7.2 DETERMINANTS OF F 160
DETERMINANTS OF ! 162
WHICH INVESTMENTS TO MAKE? 164 7.5 EMPIRICAL EVIDENCE 164
MISALLOCATION AND PRODUCTIVITY 169 7.7 THE CHOICE OF SOCIAL INFRASTRUCTURE 171
8 POPULATION AND THE ORIGIN OF SUSTAINED ECONOMIC GROWTH 181
POPULATION AND LIVING STANDARDS 182 .1 The Malthusian Era 184
COMPARATIVE DEVELOPMENT 210 8.6 SUMMARY 212
9 ALTERNATIVE THEORIES OF ENDOGENOUS GROWTH 215
A SIMPLE ENDOGENOUS GROWTH MODEL
INTUITION AND OTHER GROWTH MODELS 219
EXTERNALITIES AND AK MODELS 220
EVALUATING ENDOGENOUS GROWTH MODELS 223 9.5 WHAT IS ENDOGENOUS GROWTH? 226
10 NATURAL RESOURCES AND ECONOMIC GROWTH 228
NONRENEWABLE RESOURCES 230 .1 Setup 230
QUANTIFYING THE IMPORTANCE OF NATURAL RESOURCES 235
PRICES AS INDICATORS OF SCARCITY 237
IMPLICATIONS AND EXPLANATIONS OF DECLINING FACTOR SHARES 243
GROWTH AND THE ENVIRONMENT 247 10.6 SUMMARY 253
WHY ARE WE SO RICH AND THEY SO POOR? 257 11.2 WHAT IS THE ENGINE OF ECONOMIC GROWTH? 257
DERIVATIVES 261 .1 What Does K
MAXIMIZATION OF A FUNCTION 271 EXERCISES 273
PREFACE
It delves into the study of economic growth in more detail than is found in some current intermediate macroeconomics textbooks. Second, a new chapter (Chapter 8) on the interaction of population size and economic growth inspired by recent research on "unified theories of growth" is included.
INTRODUCTION: THE FACTS OF ECONOMIC GROWTH
- THE DATA OF GROWTH AND DEVELOPMENT
- OTHER “STYLIZED FACTS”
- the real rate of return to capital, r, shows no trend upward or downward;
- the average growth rate of output per person has been positive and relatively constant over time—that is, the
- THE REMAINDER OF THIS BOOK
The third column reports the 2008 labor force participation rate—the ratio of the labor force to the population—to show the relationship between the first two columns. The NICs surpassed even Japan's astounding rate of increase, truly exemplifying what is meant by the term "growth miracle." The poorest countries in the world showed varied growth.
THE SOLOW MODEL
THE BASIC SOLOW MODEL
- SOLVING THE BASIC SOLOW MODEL
- THE SOLOW DIAGRAM
- COMPARATIVE STATICS
- PROPERTIES OF THE STEADY STATE
- ECONOMIC GROWTH IN THE SIMPLE MODEL
By no coincidence, the difference between these two curves is the change in the amount of capital per works. AN INCREASE IN THE RATE OF INVESTMENT Consider an economy that has reached its steady-state value of output per works.
TECHNOLOGY AND THE SOLOW MODEL
- THE SOLOW DIAGRAM WITH TECHNOLOGY
- SOLVING FOR THE STEADY STATE
The behavior of the growth rate of output per worker over time is displayed in Figure 2.12. At the time of the policy change, t*, output per worker begins to grow faster.
EVALUATING THE SOLOW MODEL
This faster growth continues temporarily until the output-technology relationship reaches its new steady state. First, policy changes in the Solow model increase growth rates, but only temporarily during the transition to the new steady state.
GROWTH ACCOUNTING, THE PRODUCTIVITY SLOWDOWN, AND THE NEW ECONOMY
The main culprit behind the slowdown in productivity is a significant decline in the growth rate of multifactor productivity. The other side of the slowdown in productivity after 1973 is the increase in productivity growth in the period 1995-2000, sometimes called the.
APPENDIX: CLOSED-FORM SOLUTION OF THE SOLOW MODEL
More generally, a key source of these countries' rapid growth performance is factor accumulation. Therefore, Young (1995) concludes that the framework of the Solow model (and the extension of the model in Chapter 3) can explain a significant part of the rapid growth of the East Asian economies.
EXERCISES
THE SOLOW MODEL WITH HUMAN CAPITAL
EMPIRICAL APPLICATIONS OF NEOCLASSICAL GROWTH MODELS
CONVERGENCE AND EXPLAINING DIFFERENCES IN GROWTH RATES
An important prediction of the neoclassical model is this: among countries that have the same steady state, the convergence hypothesis should hold: poor countries should grow faster on average than rich countries. Mankiw, Romer and Weil (1992) and Barro and Sala-i-Martin (1992) show that this prediction of the neoclassical model can explain differences in growth rates across the world. In terms of the neoclassical model, these shocks are interpreted as discrete changes in TFP.
THE EVOLUTION OF INCOME DISTRIBUTION
According to this figure, around 60 percent of the world's population in 1960 had a GDP per working in less than 10 percent of the United States. Overall, around 80 percent of the world's population in both years had a GDP per working in less than 50 percent of the U.S. First, only countries that were rich at the end of the sample (ie, in the 1980s) were included.
THE ECONOMICS OF IDEAS
- WHAT IS TECHNOLOGY?
- THE ECONOMICS OF IDEAS
- INTELLECTUAL PROPERTY RIGHTS AND THE INDUSTRIAL REVOLUTION
- POPULATION AND IDEAS
- DATA ON IDEAS
- SUMMARY
In the context of the production function above, each new idea generates an increase in the technology index, A. Consider the cost of creating the first touchscreen phone or the first jet engine. To the extent that the most important or valuable ideas are patented, patent counts can provide a simple measure of the number of ideas being produced.
THE ENGINE OF GROWTH
THE BASIC ELEMENTS OF THE ROMER MODEL
- GROWTH IN THE ROMER MODEL
- GROWTH EFFECTS VERSUS LEVEL EFFECTS
- COMPARATIVE STATICS: A PERMANENT INCREASE IN THE R&D SHARE
Therefore, the growth rate of the idea stock declines over time, eventually approaching zero. What will happen to the world's advanced economies if the share of the population looking for new ideas increases permanently? Therefore, a permanent increase in the share of the population devoted to research increases the pace of technological progress temporarily, but not in the long term.
THE ECONOMICS OF THE ROMER MODEL
- THE FINAL-GOODS SECTOR
- THE INTERMEDIATE-GOODS SECTOR
- THE RESEARCH SECTOR
- SOLVING THE MODEL
Inventions or ideas in the model correspond to the creation of new capital goods that can be used by the final goods sector to produce output. Firms in the final goods sector must decide how much labor and how much of each capital good to use to produce output. It must be the case that in this simplified model the individual at the margin does not care about working in the final goods sector and working in the research sector.
GROWTH THROUGH CREATIVE DESTRUCTION
- THE BASIC ELEMENTS OF THE SCHUMPETERIAN MODEL
- GROWTH IN THE SCHUMPETERIAN MODEL
As in the Solow or Romer models, the trend growth of output per capita is determined by the growth rate of technology. Here it happens to be the expected value of the growth rate of the technology.13. The average long-term growth rate in the Schumpeterian model is identical to that of the Romer model.
THE ECONOMICS OF SCHUMPETERIAN GROWTH
- THE FINAL-GOODS SECTOR
- THE INTERMEDIATE-GOODS SECTOR
- THE RESEARCH SECTOR
- SOLVING THE MODEL
- COMPARING THE ROMER AND SCHUMPETERIAN MODELS
Innovations increase output only if final goods firms actually buy the latest version of the capital goods. We can examine the demand of the final goods firms for the intermediate goods. An intermediate-goods firm is a monopolist that produces a single version of the capital goods.
OPTIMAL R&D
A large economic literature, led by Zvi Griliches, Edwin Mansfield, and others, seeks to estimate the "social" rate of return to research conducted by firms. In contrast, the economics of ideas suggests that it is crucial to allow firms to set prices above marginal cost. It is precisely this wedge that provides the profit that is the incentive for companies to innovate.
SUMMARY
Classical economic theory argues that monopolies are bad for welfare and efficiency because they create "heavy losses" in the economy. In this case, innovators would not be able to earn the profits that motivate them to undertake research in the first place, so no research would be done. Without research, there would be no new ideas, technology would be constant, and there would be no per capita growth in the economy.
APPENDIX: SOLVING FOR THE R&D SHARE
ROMER MODEL
SCHUMPETERIAN MODEL
THE BASIC MODEL
The framework we develop is naturally based on the Romer model of technology discussed in Chapter 5.
A SIMPLE MODEL OF GROWTH AND DEVELOPMENT
- STEADY-STATE ANALYSIS
- TECHNOLOGY TRANSFER
- GLOBALIZATION AND TRADE
- UNDERSTANDING DIFFERENCES IN GROWTH RATES
This country grows by learning to use the more advanced capital goods already available in the rest of the world. How can one choose a value of g to be used in the empirical analysis of the model (as in Chapter 3). This problem considers the effect on an economy's technological sophistication of an increase in the economy's openness to technology transfer.
SOCIAL INFRASTRUCTURE AND LONG-RUN ECONOMIC
A BUSINESS INVESTMENT PROBLEM
The answer is the present discounted value of future earnings, or at least what we expect them to be. With this basic formalization of the investment problem, the decision whether to undertake the project or not is easy. If the value of the company after its establishment is greater than the costs of setting up the subsidiary, the investment project should be undertaken by the manager.
DETERMINANTS OF F
Another excellent example of the impact of government policies and institutions on the costs of starting a business is provided by Hernando de Soto's The Other Path (1989). Like his better-known namesake, this contemporary de Soto gained fame by opposing the Peruvian establishment. 2Long before he explored the Mississippi River and the southeastern United States, the better-known Hernando de Soto gained his wealth as a Spanish conqueror of Peru.
DETERMINANTS OF !
The degree to which the economic environment of a country favors production or diversion is primarily determined by the government. The government makes and enforces the laws that provide the framework for economic transactions in the economy. The power to make and enforce laws confers enormous power upon the government to engage in diversion.
WHICH INVESTMENTS TO MAKE?
Finally, the stability of the economic environment itself can be an important determinant of investment returns. An economy where rules and institutions change frequently can be a risky place to invest. While today's policies may promote productive activities in an open economy, tomorrow's policies may not.
EMPIRICAL EVIDENCE
Even if we have an index, simply showing that it is related to investment rates and TFP is not sufficient to prove that social infrastructure matters. They find that the exogenous differences in social infrastructure introduced by colonists had effects on per capita income even after the colonies gained their independence much later. These studies provide us with the best evidence that social infrastructure does in fact drive differences in investment rates.
MISALLOCATION AND PRODUCTIVITY
We can continue to increase output until the marginal product of capital is identical in all firms—the output-maximizing allocation. Social infrastructure matters whether resources move to the best firms or remain trapped in low productivity firms. Policies that subsidize low-productivity firms or restrict the mobility of capital and labor will lead to a misallocation of resources, lowering TFP.
THE CHOICE OF SOCIAL INFRASTRUCTURE
As Syverson (2004) shows, even in the United States, the productivity of a firm in the 90th percentile is roughly twice that of a firm in the 10th percentile. However, Europeans also colonized places that were relatively poor in the 1500s, such as North America, and are now relatively rich. The United States and Canada partly avoided this by having conditions that favored family farming and allowed a (relatively) broad segment of the population to participate in the political system.
GROWTH MIRACLES AND DISASTERS
The long-term distribution, according to the results in the table, strongly suggests that this convergence will play a dominant role in the continued evolution of the income distribution. In the long run, according to the results, 32 percent of countries will have a relative income of more than 80 percent of the world's leading economy and 55 percent will have a relative income of more than 40 percent. The fact that the data shows that the long-term distribution is different from the current distribution indicates that something is continuing in the world.
SUMMARY
A country in the 10 percent bin will move to an income level in the 40 percent bin or higher with a 10 percent probability after 95 years. The same applies to the "Japanese experience": a country in the 20 percent bin will move to the richest category with a 10 percent probability after 85 years. How much variation in the utilization of capital do we need to explain the variation in TFP.
Discuss the meaning of the quotation that began this chapter
Consider a production function of the form Y = IKa(hL)1-a, where I denotes total factor productivity and the other notation is standard. Assume that rates of return to capital are equal across countries because the world is an open economy, and assume that all countries are on their balanced growth paths. Suppose the production function looks like Y = IKaL1-a, where I reflects differences in social infrastructure. a) Show that differences in I across countries do not lead to differences in investment rates.
POPULATION AND THE ORIGIN OF SUSTAINED ECONOMIC GROWTH
POPULATION AND LIVING STANDARDS
