Summary midterm Economic Growth
Chapter 1: The facts to be explained
Economic growth as a research field:
1) Macroeconomics (theory of economic growth)
2) Development economics (poor countries studies)
3) Industrial organization (theory of productivity growth)
Questions of economic growth:
1) Historically: what explains the differences between countries?
2) Theoretically: what are the sources of economic growth?
3) Future: how will economic differences develop in the future?
GDP: 1 - measure of the value of all the goods and services produced in a country in a year
2 - total income (wages, rents, interest and profits) earned in a country in a year
History of growth:
1) Before 1820:
- low growth (slightly positive)
- income differences relatively small (mainly within-country differences)
2) After 1820:
- high pace of growth (and accelerating)
- higher income differences (though decline after 1980)
- inequality growth mainly due to between-country differences
Exchange rate problems:
1) Daily fluctuations (volatility risk)
2) GDP must be corrected for PPP
PPP exchange rates: artificial exchange rates, based on a standardized basket of goods and
services, corrected for bias.
Price indices:
1) Laspeyres (historical weights) overstates inflation
2) Paasche (modern weights) underestimates inflation
3) Fischer (average weights) PF = √PL√PP
Chapter 2
-
Chapter 3: Physical capital
Physical capital: objects that extend our ability or do work for us.
,Characteristics:
1) Productive (Y = F(K,L)
2) Produced (I = Y – C)
3) Rival in use
4) Earns return (Y = wL + rK)
5) Depreciates (Kt+1 = Kt – δKt + It)
Cobb-Douglas function: Y = KaL1-a
- constant returns/homogeneity: zY = (zK)a(zL)1-a
- diminishing returns: dF/dK = aKa-1L1-a / d2F/d2K = a(a-1)Ka-2L1-a < 0
Factor payment:
- competitive economy: r = MPK / w = MPL
- share of income: rK/Y = dYK/dKY = a / wL/Y = dYL/dLY = 1-a
Theory of income differences (Solow):
1) Higher investment rate/saving rate (γ)
2) Higher productivity (A)
3) Lower depreciation
4) Higher population
5) Position relative to steady state
Golden-rule saving rate: saving rate which maximizes steady-state level of consumption
Relative growth rates (Solow):
1) Lower income (below steady state)
2) Higher investment rate/saving rate
Saving rates explanations:
1) Domestic saving rate (most significant)
2) Time rate preferences
3) Poor countries simply cannot afford to save (depends on level of income)
4) Government policies
- government budget (T-G)
- institutions (pension plans)
Savings trap: countries may be trapped (there are multiple steady states), when the saving
rate depends on the level of capital.
Chapter 6: Human capital
Characteristics:
1) Productive (Y = F(K, hL)
2) Produced (Ih = Y – C – IK)
3) Rival in use (labour time foregone)
, 4) Earns return (Y = whL + rK)
5) Depreciates (ht+1 = ht – dht + Ih,t)
Forms:
1) Health
2) Education
Interaction health-income:
1) Effect of health on income (positive linear)
- increased labour participation
- higher productivity
2) Effect of income on health (positive diminishing)
Health in poor and rich countries:
1) Health view: all differences between countries have their roots in health environments
difference in health is given and cause of lower income
2) Income view: all differences between countries have their roots in aspects unrelated to
health (especially income)
difference in health caused by other factors
Return to education: increase in wages that a worker would receive if he or she had one
more year of schooling (diminishing marginal returns)
Increased wage inequality (developed countries):
1) Globalization (educated workers become scarcer) HO-model
2) Technological change (skill-biased and substitution)
Human capital in Solow model:
1) Steady state level of output is directly proportional to h
2) Differences (ceteris paribus) are proportional to differences in h
3) Wages are proportional to h
Shortcomings education in Solow:
1) Quality of education not taken into account (only years of schooling)
differences due to h underestimated
2) Positive externalities not taken into account
differences due to h underestimated
reason for government intervention
Chapter 4: Population and economic growth
Historical population growth:
1) 10,000 bc – 1800: very low (close to zero)
2) 1800 – current: high (and increasing)
Chapter 1: The facts to be explained
Economic growth as a research field:
1) Macroeconomics (theory of economic growth)
2) Development economics (poor countries studies)
3) Industrial organization (theory of productivity growth)
Questions of economic growth:
1) Historically: what explains the differences between countries?
2) Theoretically: what are the sources of economic growth?
3) Future: how will economic differences develop in the future?
GDP: 1 - measure of the value of all the goods and services produced in a country in a year
2 - total income (wages, rents, interest and profits) earned in a country in a year
History of growth:
1) Before 1820:
- low growth (slightly positive)
- income differences relatively small (mainly within-country differences)
2) After 1820:
- high pace of growth (and accelerating)
- higher income differences (though decline after 1980)
- inequality growth mainly due to between-country differences
Exchange rate problems:
1) Daily fluctuations (volatility risk)
2) GDP must be corrected for PPP
PPP exchange rates: artificial exchange rates, based on a standardized basket of goods and
services, corrected for bias.
Price indices:
1) Laspeyres (historical weights) overstates inflation
2) Paasche (modern weights) underestimates inflation
3) Fischer (average weights) PF = √PL√PP
Chapter 2
-
Chapter 3: Physical capital
Physical capital: objects that extend our ability or do work for us.
,Characteristics:
1) Productive (Y = F(K,L)
2) Produced (I = Y – C)
3) Rival in use
4) Earns return (Y = wL + rK)
5) Depreciates (Kt+1 = Kt – δKt + It)
Cobb-Douglas function: Y = KaL1-a
- constant returns/homogeneity: zY = (zK)a(zL)1-a
- diminishing returns: dF/dK = aKa-1L1-a / d2F/d2K = a(a-1)Ka-2L1-a < 0
Factor payment:
- competitive economy: r = MPK / w = MPL
- share of income: rK/Y = dYK/dKY = a / wL/Y = dYL/dLY = 1-a
Theory of income differences (Solow):
1) Higher investment rate/saving rate (γ)
2) Higher productivity (A)
3) Lower depreciation
4) Higher population
5) Position relative to steady state
Golden-rule saving rate: saving rate which maximizes steady-state level of consumption
Relative growth rates (Solow):
1) Lower income (below steady state)
2) Higher investment rate/saving rate
Saving rates explanations:
1) Domestic saving rate (most significant)
2) Time rate preferences
3) Poor countries simply cannot afford to save (depends on level of income)
4) Government policies
- government budget (T-G)
- institutions (pension plans)
Savings trap: countries may be trapped (there are multiple steady states), when the saving
rate depends on the level of capital.
Chapter 6: Human capital
Characteristics:
1) Productive (Y = F(K, hL)
2) Produced (Ih = Y – C – IK)
3) Rival in use (labour time foregone)
, 4) Earns return (Y = whL + rK)
5) Depreciates (ht+1 = ht – dht + Ih,t)
Forms:
1) Health
2) Education
Interaction health-income:
1) Effect of health on income (positive linear)
- increased labour participation
- higher productivity
2) Effect of income on health (positive diminishing)
Health in poor and rich countries:
1) Health view: all differences between countries have their roots in health environments
difference in health is given and cause of lower income
2) Income view: all differences between countries have their roots in aspects unrelated to
health (especially income)
difference in health caused by other factors
Return to education: increase in wages that a worker would receive if he or she had one
more year of schooling (diminishing marginal returns)
Increased wage inequality (developed countries):
1) Globalization (educated workers become scarcer) HO-model
2) Technological change (skill-biased and substitution)
Human capital in Solow model:
1) Steady state level of output is directly proportional to h
2) Differences (ceteris paribus) are proportional to differences in h
3) Wages are proportional to h
Shortcomings education in Solow:
1) Quality of education not taken into account (only years of schooling)
differences due to h underestimated
2) Positive externalities not taken into account
differences due to h underestimated
reason for government intervention
Chapter 4: Population and economic growth
Historical population growth:
1) 10,000 bc – 1800: very low (close to zero)
2) 1800 – current: high (and increasing)
