4-5 - Growth Flashcards

1
Q

The convergence triangle

A

A scatterplot, buildning a triangle, when graphing growth on the y-axis and GDPpc on the x-axis. The lower GDP the more spread out is the dots, then with higher income the countries converge towards zero growth.

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2
Q

Proximate determinants of growth

A
  • Factor accumulation: physical, human cap and population/labor.
  • Natural resources use
  • Productivity growth in technology and efficiecny gains
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3
Q

Fundamental determinants of growth

A

The things that explains growth deeper, how the proximate causes can increase:

  • Institutions
  • Government
  • Geography
  • Openness
  • Inequality
  • History
  • Culture
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4
Q

General production function and how is growth generated?

A

Y = F(A,K, L)
Growth is the change in Y and is generated from changes in:
- L, which is the change in population.
- K, which depends on new investments and depreciation rate.
- A, which is gains in TFP. Neoclassical models keep it exo but endo explains it.

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5
Q

Harrod-Domar model’s five assumptions:

A
  1. Closed economy: I=sY
  2. No substitution possibilities among inputs, always in fixed proportions.
  3. Capital is the limiting factor in growth, labor is unlimited supply.
  4. Constant returns to scale for each factor.
  5. Leontief fixed-proportions tech (as a result of 2 and 4). Extra deltaK increase Y with a fixed change.
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6
Q

ICOR

A

The incremental capital output ratio. Comes with the last fifth assumption in Harrod Domar, that k=deltaK/deltaY. Always a fixed rate of change that is equal to k. To increase K with an amount, we need to increase Y by something. (Bit confusing)

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7
Q

The reduced model form for change in Y (Harrod Domar):

A

deltaY = s/k - deprec.

And for per capita we also subtract n.

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8
Q

Policy implications of Harrod Domar?

A
  • Increase savings rate s
  • Decrease ICOR (k) which is equal to improving tech
  • Lower population growth
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9
Q

The big push

A

Aid as an alternative to domestic savings, pushes the country to increase investments and reach higher growth rate.

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10
Q

Solow model in general form:

A

Y = Af(K,L)

Now A is multiplicative t the model and therefore have a bigger effect.

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11
Q

Solow assumptions:

A
  • Diminishing returns to each factor of production
  • Substitution possibilities between factors
  • Constant returns to scale of the factors
  • Full employment so that L grows as fast as n.
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12
Q

What is A in the model?

A

TFP that is a potential source of growth, and is often due to improvements in tech. Tech as a public good available to everyone

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13
Q

Solow’s steady state

A

As Solow predicts convergence, the model says that when sy = (deprec + n)k, we have reached the steady state level. Here the capital per worker is constant and we cannot longer grow from capital accumulation (factor deepening).
Countries only grow up til this point –> convergence.

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14
Q

The speed of convergence:

A

It’s a negative function as the closer you get to the steady state level, you approach in a slower pace. The returns of investments become smaller, and at ss it is zero.

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15
Q

Conditional convergence:

A

Empirically, we don’t see universal convergence. Some converge, some diverge. Instead cond. convergence proposes that countries might have different ss, so need to change ss to grow further.

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16
Q

Long-run growth according to Solow:

A

Relies on displacement of the steady state. There is a limit to how much savings rate can be increased and population growth reduced. So the target is the TFP. (Solow says this is equal for all countries and therefore speaks for universal convergence, but this is not what we see).

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17
Q

Growth Acconting

A

Using Solow’s model to decompose growth into productivity or factor deepening (growth in factors of production).
By rewriting into log’s and taking the derivative w/r to time we get change in Y = A-growth + wKK-growth+ wLL-growth.

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18
Q

Growth in output=

according to Solow’s growth accounting

A

= TFP growth + factor deepening.

But TFP will always be calculated as the residual since we have data on all other things but not A.

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19
Q

Problem with A being a residual?

A

Mismeasurements in the other components will affect A = productivity.
Ex:
- wasted investments
- human capital hard to capture
- informal sector output not included in the Y

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20
Q

TFP growth in low-growth countries?

A

It is negative (!) but instead focusing on factor deepening. But remember that TFP can be mismeasured.

21
Q

Why don’t banks serve poor peope?

A
  • Admin costs (too small account)
  • Far to bank offices
  • Poor lack collateral
  • High interest rates
22
Q

4 problems with the asymmetric information problem:

A

Adverse selection:
1. The selection problem - hidden information about who is a good/bad borrower.

Moral Hazard:

  1. Cannot monitor - hidden actions
  2. Cannot distinguish genuine/false failure and thus insure against bad luck
  3. Cannot enforce repayment.
23
Q

2 costs of incomplete credit sector:

A
  1. Efficiency cost: loans not related to marginal product of capital.
  2. Equity cost: allocation of loans to wealthy reproduce poverty and inequality.
24
Q

How do poor people get access to credit?

A

Alternatives to banks use local info and social ties to overcome the problems:
- family or friends
- local money lenders with high interest rated
- micro-finance institutions
etc.

25
Q

Micro Finance Insitutions (MFIs)

A

Offer small loans to lower interest rates than money-lenders, how?
Because:
- Group liability
- Frequent installments (both for monitoring but also disciplining device)
- Self-selection by group memebers
- Dynamic incentives where loans are gradually increased
- Collective sanction in case of default

26
Q

Pros and cons of MFIs

A

Pros: access to cheaper credit
Cons: not flexible for urgent needs, not for risky long-term investments, still quite expensive, social cost in case of default etc.

27
Q

How do poor people save?

A
  • At home
  • Buying livestock, jewelry etc.
  • ROSCAS
28
Q

ROSCAS

A

Rotating savings and credit associations:
Savings club with fixed rules, regular meetings where each contribute same amount to the pot which is then allocated to one person.

29
Q

Benefits with ROSCAS:

A
  • Information sharing
  • Social
  • Commitment to save
  • Fill a market lack
  • Reduce uncertainty with the fixed rules
30
Q

Downside of “non-market institutions”:

A
  • Build on social ties so participation is restricted
  • Not very flexible, group liability and early repayment excludes riskier investments.
  • High social cost of default
31
Q

Aim of endogenous models:

A

To explain A, interpret is technology and see how this component can grow.

32
Q

Tech as a public good?

A

According to Solow yes and therefore convergence, but not for the endogenous models. They see tech as excludable since there are always patent periods after a new R&D innovation.

33
Q

Two important takeaways from the endogenous growth model:

A
  1. Technology is labor augmenting: at given K/L tech increases MPLy.
  2. Increasing returns to scale: a given increase in La increase A and thereby Y more in a country that starts with higher A. –> divergence
34
Q

What happens with skilled albor according to the endogenous model?

A

Skilled labor will move to the rich countries where they can use their skills at a larger extent and also earn an income that is equal to their MPL, which is higher in a rich country. This is prob more true than the opposite.

35
Q

Shortcomings of endogenous model:

A
  • All tech is not protected by patents.
  • Able to leapfrog innovations, adopt instead
  • Don’t explain why tech progress initiated in some countries but not others… Nor why som catch up
36
Q

Will firms invest max in R&D?

A

No underinvest, since the positive spillover effects in society and across firms are not internalized in the decision.

37
Q

Geographical clustering

A

Endogenous growth theory says that clustering is an outcome of spillovers etc since the closer firms are, the more they can benefit form each other. Ex blue banana for car sector in Europe.

38
Q

Spillovers

A

The mechanism through which productivity in one firm depends on what other firms are doing. Ex in form of:

  • access to markets
  • access to specialized labor
  • common infrastructure
  • forward/backward linkages
39
Q

Coordination problem

A

As stated before, productivity in one sector or firm will depend on what other sectors or firms do –> coordination problem that depends on expectations and information.

40
Q

Multiple equilibria in the coordination problem

A

There are multiple equilibria that are differently desirable. Individual firms’ decisions will be a reaction function of others do.
Risk averseness and uncertainty lead to underinvestment, must cross the 45 degree line to reach to the high equilibrium.
Spillovers help reaching it.

41
Q

Structural transformation

A

The change in the structural composition that happens when economies grow. The share of agriculture decrease –> manufacturing or today service sector.

42
Q

Share of labor in agriculture vs share of agriculture in GDP:

A

The share of labor starts at a very high point and shrinks as GDP grow. At the same time, the share of agriculture in GDP is always below (smaller) and decreases as well but at a slower pace.
–> Higher gap in poor countries, where labor share is high but less productive.

43
Q

Structural transformation:wage in industry

A

Must be at least equal to the wage in agriculture + the migration cost. Labor market in equilibrium when:
Wm = Wa + delta

44
Q

What is the thing differing between dual economy models?

A

The assumption about the labor force. Lewis believe in surplus A, Jorgenson no surplus in A.

45
Q

Lewis dual economy model:

A

Assumes surplus labor in A –> food prices doesn’t increase when L move, hence no change in nominal wages in industry (capital owners get all benefits from investments). Agri serves as a passive role, providing L and food. –> Policies only focused on urban.

46
Q

Jorgenson dual economy model:

A

No surplus in A so that wage=MPL –> workers move to urban manufacturing will increase food prices –> nominal wages rise. This will halt the industrialization since less profits over to invest.
–> Need tech change in A!
Ex. Green revolution. Output in A must be maintained when labor move.

47
Q

Disguised unemployment, dual economy model:

A

Now 0

48
Q

Other ways for A to contribute to growth (despite L and food):

A
  • Often large sector in LDCs -if it grow, total GDP grow.
  • Intersectoral linkages - if A grow, sectors in the value/supply chain grow.
  • Consumption linkages - higher earnings in A create more demand.
  • A as a comparative/competitive advantage.
49
Q

Pro-poor growth: 2 measures

A

Absolute pro-poor: when growth reduce overall poverty. Elasticity of poverty reduction>0.

Relative pro-poor: when growth benefit the poor relatively more than rich. Elasticity>1.