Economic Growth Notes
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|Category:||Economics and Management Notes|
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ECONOMIC GROWTH Tutorial • Harrod Domar model o Useful for development planning in 1970s o Growth in US - endogenous growth model o Models do not show booms/accelerations/stagnations very well o Volatility - not explained by Solow - BUT Solow explains the trend (just not the fluctuations in the trend) Transformation needs to be incorporated explicitly Solow model does not explain concentrated growth Expectation driven versus history driven • E.g. expectation driven - expect to sell more shoes therefore build a factory (perceived returns to investment) OR expect to sell only a few shoes so buy from a supplier • Multiple equilibria • Shift from 'good' equilibrium to 'bad' equilibrium o Industrialisation - huge fixed costs, average cost will fall o Can this model be tested?
Rich nations - constant path Poor nations - stuck being poor - stagnant Transition nations - some have taken off, some converge to the poor (middle income thinning out) • Away from steady state → ratio can change temporarily due to adjustment
Constant returns to scale can only be sustained by perfect competition. In order to have imperfect competition there must be ↑returns to scale. 2Y = F (2K, 2L, A) 2Y < F (2K, 2L, 2A) → AS NON RIVALROUS • Romer 1990 - 3 sectors: 1. R & D Competitive - proportional relation between previous knowledge and new knowledge. Scientists don't become billionaires
2. Intermediate goods sector→ IMPERFECT COMPETITION drug companies make billions 3. Final goods sector K, L, A → Y PERFECT COMPETITION • Romer, Arrow, AK → increasing returns AND PERFECT COMPETITION. HOW? Assume non-rivalrous and non-excludable A = Ao • = 1 is very specific circumstance • Endogenous assume constant returns to a factor • Lucas model→ assumes constant returns to human capital • Number of researchers ↑
• Explosive growth is not the same as exponential growth => growth rate is constant • Explosive growth is a path where growth rate itself is increasing
• Solutions to knife edge: o Essay question not true of these 2 models: Semi-endogenous • 0
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