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The New Growth Theory: Endogenous Growth Traditional growth theories (chapter 4) Don’t explore long term growth Motivation Solow residual Increases in GDP that arise not due to changes in capital of labor Exogenous and independent process of technological progress
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AISHA KHAN SUMMER 2009
SECTION G & I
LECTURE ELEVEN
ECO 102 Development Economics
Contemporary Models of Development
Chapter Five
The New Growth Theory: Endogenous Growth
Traditional growth theories (chapter 4) Don’t explore long term growth
Motivation Solow residual
Increases in GDP that arise not due to changes in capital of labor
Exogenous and independent process of technological progress
The Romer Model
Technological spillovers in the process of industrialization
Assumes Growth processes derive from the firm or industry
level CRS Capital stock includes knowledge public good
spill over
Romer model
g-n = β/[1-α+β]
g= output growth raten= population growth rate
Romer model
Finds that β >0 means that g-n > 0
Hence positive endogenous growth
Criticism
Assumes single sector production
Doesn’t incorporate the transformation of labor and capital in the production process
Allocational inefficiencies
Underdevelopment as a coordination failure
Coordination failure: A state of affairs in which agents inability to coordinate
their behavior leads to an outcome where all agents are worse off than in the alternative situation
Illustrated by the “where-to-meet” problem
Lack of coordination can lead a country to be trapped in underdevelopment. government deep intervention can help solve at times
Underdevelopment as a coordination failure
Complementarities between actions allows network effects
E.g of a complementarity The availability of specifically skilled labor and the
presence of firms that needs the labor with specific skills
Complementary investments must come at the same time
Multiple Equilibria
Multiple equilibria can arise when there is coordination failure
Graphically we can show multiple equilibria
S shaped function reflects The benefits an agent receives from taking an action
depend positively on how many other agents are expected to take the action
Multiple Equilibria
D1 D2 D3 Average investment level
Individual investment level
Multiple Equilibria
Equilibrium is where the S function intersects the 45 degree line
Stable equilibria D1 and D3
Big Push: Starting economic devpt
Coordination failure model Assumption
Economy is not able to export Subsistence economy
“big push” is needed to stimulate investment in other areas of good production (need for coordination)
Case-Study: Economist Article
Case-Study: China
Case-Study: China
This case study examines the development experience of China. Let us consult the Penn World Tables (http://datacentre.chass.utoronto.ca/pwt/) to gather statistics on these countries over time. Under PWT 6.1, choose Alphabetical List of Countries, then select China. Retrieve data on population and Real GDP per Capita (Constant price, chain series) from 1970 to 2000. Now divided
Population in 2000 to Population in 1970 Real GDP per Capita in 2000 to Real GDP per Capita in 1970
Which number is larger? What can you infer about China’s economic development from the
above comparison?