UNIT 8. MODELS OF ECONOMIC GROWTH презентация

UNIT 8. MODELS OF ECONOMIC GROWTH Assoc. prof. Mabiala G. mgg_leonard@mail.ru

Topics: Roots and Branches Adam Smith and classic evolution The Solow-Swan economic growth

references: Barro, R., „Notes on Growth Accounting”, Working Paper, No. 6654, National Bureau of Economic Research, Cambridge, 1998 Dornbusch, R., Fischer, S., Startz, R. (2007). Macreconomie, Editura Economică, București Mokir, J. (2005). Long term economic growth and the history of technology, Handbook of Economic Growth Volume 1B, edited by Phillipe Aghion and Steven N.Durlauf, Elsevier Romer, P. (2007). Economic Growth, from The Concise Ecyclopedia of Economics by David R. Henderson, Liberty Fund Socol, C. (2009). Macroeconomie – Volumul I, Editura Economică, București

The economic growth is a notion which grids The economic growth is a notion which grids both the governments and the normal people at the moment of speech. Why? Because we are still kept inside the waves of a big storm which is far from being stopped; in fact we are facing the threatening of a second wave, perhaps more dangerous than the first one. What does this economic growth mean?

According to mainstream and to most of the economics textbooks, this has been defined as an increase of the capacity of one economy to produce goods and services, using a comparison between two defined periods. The economic growth might be measured in nominal terms, which include inflation or, in real terms, adjusted with inflation. Often, the economic growth is associated with the innovation part and with the technological changes. According to mainstream and to most of the economics textbooks, this has been defined as an increase of the capacity of one economy to produce goods and services, using a comparison between two defined periods. The economic growth might be measured in nominal terms, which include inflation or, in real terms, adjusted with inflation. Often, the economic growth is associated with the innovation part and with the technological changes.

One good example in this direction is represented by the emergence of the Internet and the changes underlying the production process which have been brought by this new technology. We shouldn’t understand through the economic growth just the increase capacity of production of one economy, but also an improvement of the life quality of those people which are part of that economy(1). The economic growth can be measured through the percentage changes of various indicators GDP, GNP and GDP per capita. One good example in this direction is represented by the emergence of the Internet and the changes underlying the production process which have been brought by this new technology. We shouldn’t understand through the economic growth just the increase capacity of production of one economy, but also an improvement of the life quality of those people which are part of that economy(1). The economic growth can be measured through the percentage changes of various indicators GDP, GNP and GDP per capita.

All above-mentioned growths must be comprised in models, because the systematic structuring of reality into models represents a passion – sometime too burning passion – of the modern scientific phenomenon. In this paper we will focus on the validity and viability of these models during crisis times and we will try to define which their grade of applicability is, taking into consideration the mentioned conditions. Also, taking into consideration the fact that the research is in an incipient stage, the main model used here will be the neoclassical model of growth (Solow-Swan). All above-mentioned growths must be comprised in models, because the systematic structuring of reality into models represents a passion – sometime too burning passion – of the modern scientific phenomenon. In this paper we will focus on the validity and viability of these models during crisis times and we will try to define which their grade of applicability is, taking into consideration the mentioned conditions. Also, taking into consideration the fact that the research is in an incipient stage, the main model used here will be the neoclassical model of growth (Solow-Swan).

Traces the history of economic growth theory Traces the history of economic growth theory Begins with Adam Smith who started it all Shows how Smith’s theory evolved, and culminated in the Harrod-Domar model Explains why Solow rebelled against classical growth theory … … and why and how endogenous-growth theory came about

The economic growth models were interesting for the economists ever since the classical period (Adam Smith, David Ricardo). Keynesian models, as well as their direct descendants, the Neo-Keynesian models, claim that in order to have a stable economy it is necessary to use macroeconomic politics and the direct intervention of State for reaching the equilibrium and stimulating the economic growth. On the other side there are the models of the Neo-Classics, who are saying that the economy is self-stable and the equilibrium comes naturally. The economic growth models were interesting for the economists ever since the classical period (Adam Smith, David Ricardo). Keynesian models, as well as their direct descendants, the Neo-Keynesian models, claim that in order to have a stable economy it is necessary to use macroeconomic politics and the direct intervention of State for reaching the equilibrium and stimulating the economic growth. On the other side there are the models of the Neo-Classics, who are saying that the economy is self-stable and the equilibrium comes naturally.

Roots and Branches The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the accumulation of capital. ARTHUR LEWIS To change the rate of growth of real output per head you have to change the rate of technical progress. ROBERT SOLOW

The first revolution: Adam Smith Theory of wealth creation, public policy, and economic growth

The first revolution: Adam Smith Saving and investment stimulate growth direct effects through accumulation of capital indirect effects through labour productivity further indirect effects through interaction with exchange and trade, through foreign investment domestic market can take the place of foreign markets

The first revolution: Adam Smith Smith’s reference to ‘private misconduct’ and the ‘publick extravagance of government’ Distinction between quantity and quality Mutual advantages of trade and growth, links to geography

The first revolution: Adam Smith

The first revolution: Adam Smith Benefits from division of labour

The first revolution: Adam Smith Smith on education, efficiency, and growth Distinction between the quantity and quality of labour  education, by increasing labour productivity, increases also efficiency and growth Smith feared the economic, political, and social consequences of inferior education among the masses He favoured public support for education

The first revolution: Adam Smith - Summing up Economic growth = increase in the quantity and quality of the three main factors of production: labour, capital, and land Growth accounting is based on this classification Two shortcomings: quantity of land increase in the labour force does not really count as a source of economic growth

Adam Smith’s followers

Adam Smith’s followers John Stuart Mill rejected Malthus’s prediction that population would outgrow productive capacity more and better education would restrain population growth distribution a different matter than production but can be changed through policy

Adam Smith’s followers Karl Marx Economic mechanisms driving production and distribution are closely related The limits to growth observed by Malthus are inescapable  ‘technological unemployment’

Adam Smith’s followers Alfred Marshall organization as a fourth factor of production made explicit the connection between education and growth distribution of income and wealth matters for efficiency and growth

Adam Smith’s followers Joseph Schumpeter technology through invention, innovation, and entrepreneurship rent-seekers motivated by monopoly profits perfectly competitive markets … may not be very conducive to economic growth No rent to capture under perfect competition Static efficiency does not go along with dynamic efficiency, but ...

Adam Smith’s followers John Maynard Keynes

Enter mathematics: Harrod and Domar Paul Samuelson’s Foundations of Economic Analysis (1948) laid the basis for mathematical economics, including the modelling of ... ... dynamic interactions among macroeconomic variables

Enter mathematics: Harrod and Domar

Enter mathematics: Harrod and Domar

Enter mathematics: Harrod and Domar Harrod and Domar expressed the dynamic relationship between saving, efficiency, and growth in a simple equation which ...

The Harrod-Domar model Economic growth depends on three factors: A. the saving rate B. the capital/output ratio C. the depreciation rate

The Harrod-Domar model Shortcomings: Neither theory nor empirical evidence seemed to provide much support for the capital/output ratio as an exogenous behavioural parameter in the model a more elaborate formulation of the link between capital and output was called for The model did not leave much room for the other crucial factor of production, labour population or labour-force growth is absent from the formula, which explains output growth solely by saving and efficiency

The second revolution: The neoclassical model

The second revolution: The neoclassical model

The second revolution: The neoclassical model

The third revolution: Endogenous growth The neoclassical growth model seemed unable to answer some burning questions about economic growth Is technological change exogenous from an economic point of view? Do economists really have nothing to say about economic growth in the long run? If output per capita grows at a rate that depends solely on - in fact, is equal to - the rate of technological progress, then why is it that the growth performance of different countries differs so radically over long periods? What does the neoclassical model tell us about relative growth performance anyway?

The third revolution: Endogenous growth Do poor countries grow more rapidly than rich countries? What is the empirical evidence?

The third revolution: Endogenous growth Key idea Technology is probably not exogenous More probably Technology depends on economic factors: the amount of capital available to workers - the capital/labour ratio

The third revolution: Endogenous growth Economic growth free to respond to changes in saving and efficiency, and depreciation, even in the long run The Harrod-Domar model has thus been restored Endogenous technology makes economic growth also endogenous

The third revolution: Endogenous growth - Summary

. 2. The Solow-Swan economic growth model One of the most known models of economic growth is the neoclassical model or the Solow-Swan model of growth, as it is known in the specialised macroeconomic literature. This model is an extension of the growth model Harrod-Domar (1946); and the extension is represented by including in the model a new term: increase of productivity. In this new model, the new capital is more valuable than the old capital, because it appears as a result of the improvement of technology during the time.

Questions for review 1. Suppose foreign trade stimulates economic growth as argued by Adam Smith, other things being equal. Does it follow that large countries with limited trade with the rest of the world should be expected to grow less rapidly than small countries with extensive foreign trade? Why not? 2. ‘A high saving rate ensures rapid economic growth.’ Is this statement true or false? Discuss.

Questions for review 3. Explain how more and better education affects (a) the level of per capita GNP in the long run and (b) its long-run rate of growth according to I. the Harrod-Domar model; II. the Solow model; III. the endogenous-growth model. 4. Why does increased depreciation of capital reduce economic growth, other things being equal? Does it matter whether the depreciation is physical or economic? - i.e. whether it results from physical wear and tear or from low-quality investment decisions in the past.

Further, we will briefly present few of the main characteristics of this model, as well as the function on which this is built, but also changes of the models due to the variable compounds. This model actually shows how the rate of economic growth, the population growth and the technological progress influence the economic growth during a certain period of time. The premises used in this model are: Further, we will briefly present few of the main characteristics of this model, as well as the function on which this is built, but also changes of the models due to the variable compounds. This model actually shows how the rate of economic growth, the population growth and the technological progress influence the economic growth during a certain period of time. The premises used in this model are: The economy is perfectly competitive; There are two production factors which are perfectly substitutable (work L and capital K – in the initial analysis does not appear the technical progress); The perfect mobility of the production factors;  Complete employment in using the resources (Socol, 2009). In this model, the production function is one of the type Cobb-Douglas, in the following format:

 

The production function represented by the correlation between the output per inhabitant and the coefficient capital-work may be graphically represented as follows