Topic 3 : Transition to Modern Economic Growth

Transcription

1 Topic 3 : Transition to Modern Economic Growth Department of Economics University of Warwick November, 2013

2 1. What are the main features of endogenous growth theory? First, let s talk about the Solow growth model, an exogenous growth model Y = F (L, K) : aggregate production (output) L : aggregate population (labor force), K : aggregate capital Define y = Y L : output per head, k = K L : capital per head s : saving rate (fixed or exogenously given) Then sy : amount of saving which is equal to investment

3 1. What are the main features of endogenous growth theory? some technical stuff, Define n = L L : population growth rate where L = L t We can think of L as change in population Also K = sy change in capital is equal to investment

4 1. What are the main features of endogenous growth theory? some more technical stuff, we know k = K L k k = and K K = sy K = sy k ( K L )/( K L ) = t (ln K L ) = K t (ln K ln L) = K L L K K = k k + L L Then, sy k = k K k + n (as K = sy k L and L = n) Therefore k = sy nk

5 1. What are the main features of endogenous growth theory? Equation, k = sy nk determines the dynamic of economic growth in Solow model. k is change in capital per head If sy > nk, then k > 0 k increases If sy < nk, then k < 0 k decreases Intuitively, in order to increase k, you have to save (invest) enough (sy) to offset the decrease in k due to population growth (nk).

6 1. What are the main features of endogenous growth theory? Equation, k = sy nk determines the dynamic of economic growth in Solow model. k is change in capital per head If sy > nk, then k > 0 k increases If sy < nk, then k < 0 k decreases Intuitively, in order to increase k, you have to save (invest) enough (sy) to offset the decrease in k due to population growth (nk).

7 1. What are the main features of endogenous growth theory? Then how does k determines y (income per head)? We can define y = f (k) from y = Y L = f ( K L, L L ) = f (k, 1)

8 1. What are the main features of endogenous growth theory? y, nk nk y*** y* y** y = f(k) sy = i k** k* k*** k

9 1. What are the main features of endogenous growth theory? If initially, k = k then nk > sy ( k < 0) k (also y) If initially, k = k then nk < sy ( k > 0) k (also y) At k, sy = nk then k = 0 k (also y) does not change k is called steady state

10 1. What are the main features of endogenous growth theory? Basically, economic growth in Solow model is the process of converging to the steady state. So one important mechanism to have economic growth in this model is by accumulating more capital (by saving). But this mechanism has some limitations in achieving sustained economic growth (why?) The model also implies one needs to have increase in TFP to have sustained economic growth. But in this model, TFP is exogenously given and fixed across countries.

11 1. What are the main features of endogenous growth theory? On the other hand, the endogenous growth models say TFP is endogenously determined Assume a production functiony = A F (K, L) where A =TFP and F (K, L) = output generated by inputs. Exogenous (Solow) model assumes A is a given number and exogenous to the model. But endogenous model assumes A is determined within the model

12 1. What are the main features of endogenous growth theory? For example A = λk. A is an increasing function of capital. A rationale behind this assumption is that investments produce not only capital but also knowledge. This guarantees sustained economic growth as more capital is accumulated.

13 2. What was the role of institutions in modern economic growth? Let s focus on the institutional change after the Glorious Revolution and its implications (North and Weingast, 1989) The Stuart monarchy was always in deficit but the parliament mostly did not approve the tax raise. Methods to raise revenue include - forced loans - sales of monopolies - selling hereditary titles - simple expropriation Also the Crown had some prerogative powers over the common law

14 2. What was the role of institutions in modern economic growth? loans.pdf

15 2. What was the role of institutions in modern economic growth? Following the Glorious Revolution - the era of parliamentary supremacy - curtailed the Crown s prerogative power All these changes resulted in financial revolution which - secured property rights - stabilized public and private debt markets - resulted in growth and development of financial intermediaries (Bank of England) As a result, capital markets flourished This change in institution, they argue, was the cornerstone of the Industrial Revolution

16 2. What was the role of institutions in modern economic growth?

17 3. How did other North-Western European countries compare with Britain? Kuznets characteristics 1) High rates of per capita output and population 2) Productivity or intensive growth 3) Structural transformation 4) Changes in the structure of society 5) Opening up of international communications 6) Wide gap between developed and under-developed nations While Britain satisfies all 6 characteristics of MEG, Netherlands misses out some. 1st criterion : It had high growth in per capita income but it wasn t sustained. 2nd criterion : It also had growth in productivity but it was mainly based on Smithian growth based on specialization, not technical progress in industry.

18 3. How did other North-Western European countries compare with Britain? 3rd criterion : It experienced shift from agriculture to industry and service sectors, but never moved to large scale factories. 4th, 5th and 6th conditions are well met in Dutch economy. In some aspects Dutch growth was clearly modern, but not all.

19 5. What was the role of technology and incentives in the industrial revolution? In Britain, wage was high but energy was cheap. Famous inventions of Industrial Revolution are responses to this condition. More of labour-saving and resource-using technologies were developed. Examples include steam engine, spinning and weaving machines and iron making process.

20 7. What are the main features of unified growth theory? Malthusian Regime The economy is Malthusian steady-state equilibrium. Technological progress is slow. The return to human capital is low rightarrow parents have no incentive to substitute child quality for quantity Temporary increase in income increases population proportionally. Output per capita fluctuates around a stationary level and then around an increasing but minor trend. The inherent Malthusian interaction between population and technology gradually increases both population size and the rate of technological progress.

21 7. What are the main features of unified growth theory? The Post-Malthusian Regime The pace of technological progress increases due to the Malthusian interaction between population. Income per capita and population grow at an increasingly faster rate. The demand for human capital gradually increases towards the end of the period.

22 7. What are the main features of unified growth theory? The Post-Malthusian Regime Technological progress and the rise in the demand for human capital has two effects - Income Effect : More resources for raising children - Substitution Effect : Reallocation towards child quality The income effect dominates and both population quantity and quality increases Output per capita increases along with increase in the rate of population growth

23 7. What are the main features of unified growth theory? Demographic Transition and Sustained Growth Technological progress intensifies further due to the gradual increase in the level of human capital Demand for human capital further increases The substitution effects dominates and fertility rates decline permanently, permitting the gain in productivity to be permanently transformed into gains in output per capita The economy converges to a steady state where output per capita grow at positive rate and population growth is moderate

24 8. What are the virtues and weaknesses of unified growth theory? Deterministic view Unlikely that all economies have to pass through stages in same order ex) France Huge income variances across countries can not be explained No role for institutions