Classic Theories of Economic Development

1
Classic Theories of Economic Development

• Chapter 3

2
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

3
The Historical Record Kuznets Six
Characteristics of Modern Economic Growth

• High rates of per capita income and population
  growth
• High rates of total factor productivity increase
• High rates of economic structural transformation

• High rates of social, political, and ideological
  transformation
• International economic outreach
• Limited international spread of economic growth

4
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

5
Goal explaining the stylized facts of economic
development
6
(No Transcript)
7
(No Transcript)
8
Economic Analysis of Growth Aggregate (1-sector)
Models

• Rostow stages of growth
• Harrod-Domar
• Growth accounting
• Solow model

9
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

10
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).

11
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

12
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

13
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

14
The Solow Model

• Solow (1956) introduced concept of steady state
  growth (capital investment population
  growth)
• Neoclassical production function
• Y bK?L(1-?), b gt 0, 0 lt ? lt 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

15
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?

16
(No Transcript)
17
(No Transcript)
18
Two-sector models

• Lewis
• 2-sector general equilibrium

19
The Lewis Model of Modern-Sector Growth in a
Two-Sector Surplus-Labor Economy
20
Two-Sector ModelSupply
YM
I/PM
- PA/PM ?F/?YA
YM (I/PM) (PA/PM)YA
I/PA
YA