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Economic Growth Notes

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ECONOMIC GROWTH

Tutorial


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Harrod Domar model Useful for development planning in 1970s Growth in US - endogenous growth model Models do not show booms/accelerations/stagnations very well 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 Industrialisation - huge fixed costs, average cost will fall 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

→K↑
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


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