components of economic growth - wordpress.comsavings from present income invested to increase future...

Components of Economic Growth

Components of Economic Growth1. 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

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


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

Rad

io

Growth in Resources What happens when capital stock grows?

What happens when land resources grow?


Components of Economic Growth3. 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}


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


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


Solow Growth ModelThe 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.

9Econ N171 Lec 6 Jun 28, 2011 Atanu Dey

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


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


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


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


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


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


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


components of economic growth - wordpress.comsavings from present income invested to increase future...

Documents