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Economics Notes Macroeconomic Principles Notes

Beyond The Solow Model Notes

Updated Beyond The Solow Model Notes

Macroeconomic Principles Notes

Macroeconomic Principles

Approximately 260 pages

In depth, typed notes covering the Macroeconomic Principles (EC210) course at LSE (London School of Economics). Covers the full content of the course including the following topics:

- Economic Measurement
- Economic Growth
- The Malthusian Model
- The Solow Model
- Endogenous Growth Models
- Consumption
- Ricardian Equivalence
- Credit Market Imperfections
- Investment
- Unemployment
- Issues in the Labour Market
- The Dynamic Macroeconomic Model
- The Dynamic Monetary Model
- Bus...

The following is a more accessible plain text extract of the PDF sample above, taken from our Macroeconomic Principles Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Beyond the Solow Model 27 October 2010 Topics * Why doesn't capital move from rich to poor countries * Growth accounting * Development accounting * The "AK" model Reading * Williamson (Chapter 6-7, p.225-245) * Weil (Chapter 7) Beyond the Solow Model * Three main reasons why growth economists have moved beyond Solow model: * Lucas - "Why doesn't capital move form rich to poor countries?" * Growth accounting shows the important contribution of technological progress to growth within a country * Development accounting shows difference in the levels of "technology" are needed to account for large cross-country income differences Why Doesn't Capital Flow From Rich to Poor Countries? * Lucas argues that large differences in income per worker must imply large differences in capital per worker * This implies that returns to capital in the poor countries must be much higher than in the rich * So why doesn't capital flow from rich to poor? Why Doesn't It? Method for deriving return on capital as a function of y * Allows us to compare return on capital between countries * Starting with the production function: * Output per worker: * * Express k as a function of y: * The marginal product of capital: ? i.e. return on capital * Substitute the relationship between k and y into MPK to deliver MPK as a function of y: * Return on capital as a function of y: = * For an example Lucas compared income per capita ratio between India and the US (about 15 in 1988) (average of U.S. and Indian capital shares) so that * He set times * If z is the same and y is 15 times higher in the US, then the MPK in India must be higher * So if return to capital is 58 times higher in India why doesn't capital flow from the US to India * Possible answers: ? There is missing capital in the model (i.e. human capital) * TFP is different across countries Interpretations of TFP * One interpretation of TFP is the level of technology ? But poor countries don't need to carry out R&D, they can adopt the technology of the rich countries, so why don't they adopt? * A more general interpretation of TFP: * TFP is the level of effective technology # i.e. technology operates with different efficiencies in different countries even when they have access to the same technology ? This may be because of institutions * There is a gap between the MPK and private incentives to save/invest due to tax rates, corruption, risk of expropriation ? Graph demonstrating the link between protection from expropriation and GDP per Capita Institutions * One reason that capital doesn't flow * We focus on the set of institutions that encourage productive activities such as investment in physical and human capital or technology adoption, over "diversion or rent-seeking" * Institutions = The set of rules which govern decision making * Rent-Seeking (Diversion) = Activities which try to take from the economy and do not add to the aggregate economy * Baumol (1990 JPE) argued that policies affect the rules of the game * i.e. some countries focus more on intellectual achievements in the middle ages * There are vast differences in GDP per capita despite close proximity and relationships between nations * i.e. North and South Korea, Hong Kong and China before 1998 Growth Accounting * Another reason that capital doesn't flow * Growth Accounting = Measures how much of the growth in aggregate output is accounted for by factor accumulation (e.g. capital, labour and human capital) and by increases in total factor productivity (not directly measurable) Capital Accumulation vs. Technological Progress Course Notes Page 15 Key Points * Reasons for moving beyond Solow model (3) * Why doesn't capital flow from rich to poor countries? * Interpretations of TFP * Institutions * Growth accounting * Alwyn Young - "Asian Tiger Economies" * Development accounting * Why is there technological progress? * Why is endogenous growth not possible in Solow model * The "AK" model Definitions * Growth Accounting = Measures how much of the growth in aggregate output is accounted for by factor accumulation (e.g. capital, labour and human capital) and by increases in total factor productivity (not directly measurable) * Institutions = The set of rules which govern decision making * Rent-Seeking (Diversion) = Activities which try to take from the economy and do not add to the aggregate economy Formulae * * From C.D function: * In steady state: * Return on capital as a function of y: = * Solow Residual:

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