Components of Economic Growth

Transcription

1 Components of Economic Growth

2 Components of Economic Growth 1. Capital Accumulation: savings from present income invested to increase future output and income New factories, equipment, etc., increase the capital stock New infrastructure Investment in human capital education complementary to physical capital Involves a tradeoff between present and future consumption Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 2

3 Components of Economic Growth 2. Population and Labor Force Growth More productive workers and larger domestic markets But there are tradeoffs Depends on the ability of the economy to absorb workers Demographic dividend Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 3

4 Radio Production Possibilities Frontier (PPF) Combining human capital and physical capital expands the production possibilities frontier PPF is the maximum attainable output combinations when all resources are fully and efficiently used Rice Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 4

5 Growth in Resources What happens when capital stock grows? What happens when land resources grow? Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 5

6 Components of Economic Growth 3. Technological Progress Improved ways of doing things Three types Neutral producing more with the same inputs, but as if all input levels were raised equally Labor saving higher output using the same amount of labor Capital saving higher output using the same amount of capital {We need diagrams for these} Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 6

7 Endogenous Growth Also called New Growth Models The Solow model ascribes growth to exogenous technological change Economies will conditionally converge to the same level of income if they have the same rates of savings, depreciation, labor force growth and development It provides the basic framework for the study of convergence across countries All economies will converge to zero growth eventually, if Solow Growth model is exact Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 7

8 What is Not Explained That there are differences in sustained growth rates across countries even if they have the same savings rates and the same capital-labor ratio There is also an unexplained portion of growth rate called the Solow Residual That part of the growth rate that is not explained by the savings rate and the population growth rate What explains capital flight from developing economies to developed economies Flow from the poor to the rich Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 8

9 Solow Growth Model The curves intersect at point A, the "steady state". At the steady state, output per worker is constant. However total output is growing at the rate of n, the rate of population growth. Econ N171 Lec 6 Jun 28, 2011 Atanu Dey 9

10 Neo-classical Models Fail to Explain Neo-classical theories like the Solow Model fail in some regards The variations in the Solow residual across countries NC theory explains the difference in terms of exogenous technological change But it fails to account for differences in Solow residuals in economies with similar technologies The direction of investments flows is also not explained Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 10

11 From the Poor to the Rich Poor countries have low capital-labor ratio K/L = k So they must have higher returns on capital they should have higher investments rising productivity improved standard of living, etc But this is not seen. Instead, domestic capital flight This calls for a different explanation Endogenous Growth models, or the New Growth Models Primary among them is the Romer Growth Model Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 11

12 Endogenous Growth Persistent growth that is determined by the system governing the production process rather than arising from forces outside the system That GDP growth is a natural consequence of the long run equilibrium These models try to explain the Solow Residual that rate of growth that is left unexplained and exogenously determined in the Solow neoclassical growth equation Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 12

13 How they differ Neoclassical models assume diminishing marginal returns to capital these are discarded in the New Growth models NC assume constant returns to scale in aggregate production this is replaced y increasing returns to scale in the New Growth models New Growth models introduce the role of externalities in determining the rate of return on investment Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 13

14 Human Capital New growth models assume that investment in human capital generate external economies and productivity improvements that offset the effect of diminishing returns to capital This is used to explain increasing returns to scale and the divergent long-term growth patterns among economies They do emphasize the importance of savings (as in the HD and Solow models) and investment in human capital Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 14

15 How they work Investments in physical and human capital generate external economies and productivity improvements This leads to sustained long-term growth Thus there is no equalizing of growth rates across economies National growth rates remain constant and differ across countries, depending on the savings level and technology There is no catch-up of poor countries with rich countries with similar savings and population growth rates Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 15

16 They Explain The anomalous international flow of capital that increase wealth disparities The potential high rates of return on investment in poor countries is eroded by lower levels of complementary investments in human capital (education), infrastructure, and R&D Econ N171 Lec 7 Jun 29, 2011 Atanu Dey 16