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Classic Theories of Economic Development by wyf14327

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									Classic Theories of Economic
        Development

Chapter 3




                          Chapter 3 Slide 1
Why are growth rates important?

•   Growth rates matter due to
    compounding
    • 1% growth for 20 yrs = 22% increase
    • 2% growth for 20 yrs = 48.6% increase
    • 3% growth for 20 yrs = 81% increase
•   Historical growth patterns tell us useful
    information about contemporary growth
    prospects

                                         Chapter 3 Slide 2
The Historical Record: Kuznet’s
Six Characteristics of Modern
Economic Growth
   High rates of per        High rates of social,
    capita income and         political, and
    population growth         ideological
   High rates of total       transformation
    factor productivity      International
    increase                  economic outreach
   High rates of            Limited international
    economic structural       spread of economic
    transformation            growth
                                             Chapter 3 Slide 3
    The Economics of Growth:
    Capital, Labor, and Technology
   Capital accumulation
   Population and labor force growth
   Technological improvements
    – Increases in efficiency of existing processes
    – New processes
   Y = f(L, K, T)
   Stylized facts:
    – aggregate growth rates
    – change in sectoral composition: the decline in the
      share of agriculture in GDP
                                                  Chapter 3 Slide 4
Goal: explaining
the stylized facts of
economic
development




                        Chapter 3 Slide 5
Chapter 3 Slide 6
                                                     GDP per capita

                     35,000



                     30,000



                     25,000
GDP/capita ($1990)




                     20,000



                     15,000



                     10,000



                      5,000



                         0
                         1965   1970   1975   1980      1985          1990    1995           2000           2005   2010
                                                               Year
                                                                                                                                 GDP Growth
                                                           USA        China

                                                                                                   16%


                                                                                                   14%


                                                                                                   12%


                                                                                                   10%


                                                                                                   8%
                                                                                     Growth Rate




                                                                                                   6%


                                                                                                   4%


                                                                                                   2%


                                                                                                   0%
                                                                                                     1980          1985   1990        1995            2000         2005      2010

                                                                                                   -2%


                                                                                                   -4%
                                                                                                                                      Year

                                                                                                                                    USA       China          Chapter 3 Slide 7
    Economic Analysis of Growth:
    Aggregate (1-sector) Models
   Rostow stages of growth
   Harrod-Domar
   Growth accounting
   Solow model




                              Chapter 3 Slide 8
     Harrod-Domar Growth Model
   Y = (1/k) K  K = k Y
   I = K
   S = sY
   S=I
   Therefore sY = S = I = k Y
         sY = k Y  Y/Y = s/k



                                   Chapter 3 Slide 9
    Harrod-Domar Growth Model (cont.)

                    Y/Y = s/k
      GDP growth rate =
                    (savings rate) x (productivity of capital)


E.g., s = .05, k = 3, growth rate = .02.

Implication: savings and investment the key to
  sustained growth?
Problem: what is required to make assumptions
  valid? (Hint: S = I).
                                                            Chapter 3 Slide 10
    Growth Acounting Model
Y = f(K, L) (note H-D is special case)

Differentiate wrt to time:
      dY/dt = fL dL/dt + fK dK/dt

Rearrange:
    (1/Y)dY/dt = (fLL/Y)(1/L)dL/dt
                    + (fKK/Y)(1/K)dK/dt
                                         Chapter 3 Slide 11
    Growth Acounting Model (cont.)

Let * denotes growth rate,  is prodn elast),
  we have:
          Y* = L L* + K K*

Contrast with H-D model…
          Y* = Y/Y = s/k
          K = I = sY so K* = I/K = sY/K


                                        Chapter 3 Slide 12
   Growth Acounting Model (cont.)

Question: does growth in L and K account for
 growth in Y?
Answer: No – there is a “residual” that
 appears to reflect changes in input quality
 and technology…




                                      Chapter 3 Slide 13
  The Solow Model
Solow (1956) introduced concept of steady
 state growth (capital investment +
                    population growth)

  – Neoclassical production function
    Y = bKL(1-), b > 0, 0 <  < 1 (CRS: why?)
  Let  = 1/L then
  y = Y = bKL(1-) = b(K)(L)(1-) = bk
  where y = Y/L and k = K/L

                                          Chapter 3 Slide 14
       The Solow Model (cont.)
   Assume savings = gross investment.
   Net capital accumulation per worker
      = gross investment per worker (= savings per worker)
         – depreciation() – rate of growth in labor force(n)
    Thus:
     k = sy – k – nk

     The steady state of the model occurs where k = 0, I.e.,
      where sy = ( + n)k.
     How do changes in parameters affect equilibrium k?


                                                      Chapter 3 Slide 15
Solow Growth Model: y = b*k^a

Capital (K) Labor (L) b       a         s          n          d          k =K/L        y           s*y       (d+n)k
        10           5    5       0.5       0.25       0.02        0.3             2    7.071068    1.767767       0.64
        20           5    5       0.5       0.25       0.02        0.3             4          10         2.5       1.28
        30           5    5       0.5       0.25       0.02        0.3             6    12.24745    3.061862       1.92
        40           5    5       0.5       0.25       0.02        0.3             8    14.14214    3.535534       2.56
        50           5    5       0.5       0.25       0.02        0.3            10    15.81139    3.952847        3.2
        60           5    5       0.5       0.25       0.02        0.3            12    17.32051    4.330127       3.84
        70           5    5       0.5       0.25       0.02        0.3            14    18.70829    4.677072       4.48
        80           5    5       0.5       0.25       0.02        0.3            16          20           5       5.12
        90           5    5       0.5       0.25       0.02        0.3            18     21.2132    5.303301       5.76
      100            5    5       0.5       0.25       0.02        0.3            20    22.36068     5.59017        6.4

Capital (K) Labor (L) b       a         s          n          d          k =K/L        y           s*y       (d+n)k
        10           5    5       0.5       0.25       0.02       0.35             2    7.071068    1.767767       0.74
        20           5    5       0.5       0.25       0.02       0.35             4          10         2.5       1.48
        30           5    5       0.5       0.25       0.02       0.35             6    12.24745    3.061862       2.22
        40           5    5       0.5       0.25       0.02       0.35             8    14.14214    3.535534       2.96
        50           5    5       0.5       0.25       0.02       0.35            10    15.81139    3.952847        3.7
        60           5    5       0.5       0.25       0.02       0.35            12    17.32051    4.330127       4.44
        70           5    5       0.5       0.25       0.02       0.35            14    18.70829    4.677072       5.18
        80           5    5       0.5       0.25       0.02       0.35            16          20           5       5.92
        90           5    5       0.5       0.25       0.02       0.35            18     21.2132    5.303301       6.66
      100            5    5       0.5       0.25       0.02       0.35            20    22.36068     5.59017        7.4




                                                                                                         Chapter 3 Slide 16
                                          Solow Growth Model

                   25




                   20



                                                                                 y
                                                                                 sy
Output/Labor (y)




                   15
                                                                                 d=.3
                                                                                 d=.35
                                                                                 Pow er (y)
                                                                                 Pow er (sy)
                   10
                                                                                 Linear (d=.3)
                                                                                 Linear (d=.35)



                   5




                   0
                        0   5   10                             15   20    25
                                     Capital/Labor Ratio (k)




                                                                         Chapter 3 Slide 17
Two-sector models
   Lewis
   2-sector general equilibrium




                                   Chapter 3 Slide 18
The Lewis Model
of Modern-Sector
Growth in a Two-
 Sector Surplus-
 Labor Economy




                   Chapter 3 Slide 19
                 Two-Sector Model:
   YM
                 Supply

I/PM
        - PA/PM = F/YA



                  YM = (I/PM) – (PA/PM)YA




                     I/PA           YA



                                     Chapter 3 Slide 20

								
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