background for barry eichengreen’s jan. 31 lecture: …webfac/eichengreen/e191_sp12/...2012/01/24...

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Motivation

Growth Accounting

Solow Model

Lewis Model

How to Frame an Economics Research Question

Summary

Reminders for Next Week

Background for Barry Eichengreen’s Jan. 31Lecture: “The Chinese Economy: Growth and

Slowdown”Econ 191: Background Lecture 1

Dawn Powers

Jan. 24, 2012

Dawn Powers Background for Jan. 31: “The Chinese Economy”

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Growth Accounting

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Lewis Model


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Outline

1 Announcements

2 Motivation

3 Growth Accounting

4 Solow Model

5 Lewis Model

6 How to Frame an Economics Research Question


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Announcements

To confirm: Links to papers are located on the syllabus, notdirectly on the webpage. If you have any trouble downloadingthe papers, please email the GSIs: [email protected] [email protected] up for papertopic meetings with GSIs by tomorrow, Wed., Jan. 25, at:https://docs.google.com/spreadsheet/ccc?key=0AujH9yk8ZzyodEM0TC1zVmhBOV9NWGJfU0oyN2ZEdnc


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Next Week’s Topic“The Chinese Growth and Slowdown”

Next week, Professor Eichengreen will discuss:Gregory C. Chow: “How and Why China Succeeded in HerEconomic Reform”Yiping Huang and Bijun Wang: “Rebalancing China’sEconomic Structure”Barry Eichengreen, Donghyun Park, and Kwanho Shin: “WhenFast Growing Economies Slow Down: International Evidenceand Implications for China.”


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Next Week’s Topic“The Chinese Growth and Slowdown”

This week, Dawn will discussWhy studying China may be importantSome important facts about growthBasics of growth accountingSolow growth modelLewis modelHow to frame an economics research question


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Motivation

Why China?About a fifth of the world’s population (1.4 out of 6.8 billion)Large economy, and an important player in world economicand political affairs (about 10% of World GDP, with secondlargest GDP)Example of a poor country graduating to a status ofmiddle-income country (and possibly more)Example of a successful transition from a centrally planned toa market-based economy (contrast with former countries ofUSSR)


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Figure: Chinese GDP relative to World, over Time

Source: World Economic Outlook, IMF


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Motivation

QuestionsWhat are the reasons for the rapid rise of China? (Chow 1985)Is rapid economic growth sustainable in China? (Eichengreenet al. 2011)If yes, then great! If not, what can be or is being done tosustain it? (Huang et al. 2010)Are there lessons to be learned for other nations?


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MotivationKaldor Facts

Fact 1: “There is enormous variation in per capita incomeacross economies. The poorest countries have per capitaincomes that are less than 5 percent of per capita incomes inthe richest countries.”


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Figure: Cross-Country Incomes over Time

Source: C. Jones


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Fact 2: “Rates of economic growth vary substantially acrosscountries.”


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Table: Growth Rates of GDP per capita

Source: World Economic Outlook, IMF


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Fact 3: “Growth rates are not generally constant over time.For the world as a whole, growth rates were close to zero overmost of history but have increased sharply in the twentiethcentury. For individual countries, growth rates also changeover time.”


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Figure: World GDP per capita

Source: A. Maddison


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Motivation

Figure: China GDP per capita

Source: A. Maddison


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Fact 4: “A country’s relative position in the world distributionof per capita incomes is not immutable. Countries can movefrom being ’poor’ to being ’rich,’ and vice versa.”


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Figure: Catching Up

Source: C. Jones


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What explains these facts? Is there a general framework toanalyze the determinants (i.e. sources) of economic growth?Yes: Growth accounting (Solow 1957).


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Growth AccountingBasics

Growth accounting uses simple calculus and algebra toidentify the contributions of each input in the productionfunction–technology, capital, and labor–to a country’s nationaloutput/income.

We can also use simple math to see how the contribution ofeach production-function input to national output/incomechanges over time– this, by definition, is the contribution ofeach input to economic growth.

(Note: Later, we will look at the Solow and Lewis models,which–rather than deriving the contributions of growth sourcesusing math–assume from the get-go that some growth sourcesare more important than others.)


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Step 1: Specify the country’s production function

Start with a country’s production function: Yt = F (At ,Kt , Lt)

Production function: How inputs become outputsYt : Country’s output/income at time t (cars movies, BBQ,...)At : Country’s state of technology or total factor productivity(TFP) at tKt : Country’s stock of capital at t (bulldozers, factorybuildings, computers,...)Lt : Country’s labor supply at t (engineers, waiters, teachers,...)


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The process of identifying the contribution of each input intothe production-function will be easier to grasp if we turn thecountry’s general production function Yt = F (At ,Kt , Lt) intoa more specific production function.


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We do this by making a reasonable assumption about whatshape the production function takes:

Assume this production function exhibits constant returns to

scale, i.e.:

F (cAt , cKt , cLt) = cAtF (Kt , Lt), where c > 0 is any constant.

(Intuitively, constant returns to scale means that outputchanges proportionally with changes in all of its traditionallymeasured inputs.)


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By making the above assumption, we can differentiateF (cAt , cKt , cLt) = cAtF (Kt , Lt) with respect to c and plug inc = 1, which gives us:

∂Yt∂c

= ∂[cAtF (Kt ,Lt)]∂c

= At(∂F

∂KKt +

∂F

∂LLt).


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We can then replace∂F∂K KtYt

= α and∂F∂L LtYt

= 1 − α to get:Yt = AtKα

t (Lt)1−α, our familiar Cobb-Douglas productionfunction,where

α: Output elasticity of capital1 − α: Output elasticity of labor.


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We now have a specific production function:Yt = AtKα

t (Lt)1−α

Moreover, by inspection, this production function tells us that,if national output/income changes, it can only be because thelevels of the nation’s TFP, capital stock, or labor force change.

Now, let’s determine each input’s contribution to the country’seconomic growth in turn.


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Step 2: Derive each production-function input’s contribution tonational output/income

Changes in the Capital Stock:Recall our production function: Yt = AtKα

t (Lt)1−α

Consider what happens to output/income Yt if a country’scapital stock increases from its current value Kt to Kt +�K .(Note that this is a proportional increase of �K

Kt.)


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Changes in the Capital Stock:Recall the rule of thumb for the proportional growth rate of aquantity raised to a power: gJP = P ∗ gJ(In words, gJP , the proportional growth rate of a quantity JP

, equals

P ∗ gJ , quantity J’s growth rate multiplied by its exponent P.)

Apply this rule of thumb to find the proportional increase inouput �Y

Ytcaused by the above proportional increase in the

capital stock �KKt

:gY = �Y

Yt= gKα = α�K

Kt


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Changes in the Capital Stock:Practical example: If the output elasticity of capital α equaled0.5, and if the proportional change in the capital stock �K

Ktwas 3%, the proportional change in output would be:

�YYt

= α�KKt

= 0.5(3%) = 1.5%.


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Changes in the Labor Supply:Again, recall our production function: Yt = AtKα

t (Lt)1−α

Similarly to the previous example, consider what happens tooutput/income Yt if a country’s labor supply increases from itscurrent value Lt to Lt +�L.(Note again that this is a proportional increase of �L

Lt.)


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Changes in the Labor Supply:Apply the same rule of thumb as before to find theproportional increase in ouput �Y

Ytcaused by the above

proportional increase in the labor supply �LLt

:gY = �Y

Yt= gL1−α = (1 − α)�L

Lt


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Changes in the Labor Supply:Practical example: If the output elasticity of labor 1 − αequaled 0.5, and if the proportional change in the labor supply�LLt

was 1%, the proportional change in output would be:�YYt

= α�LLt

= (1 − 0.5)(1%) = 0.5%.


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Changes in Total Factor ProductivityAgain, recall our production function: Yt = AtKα

t (Lt)1−α

Similarly to the previous example, consider what happens tooutput/income Yt if a country’s TFP increases from itscurrent value At to At +�A.Because there is no exponent on At in the production function,a proportional increase in TFP produces the same proportionalincrease in output:

gY = �YYt

= gA = �AAt


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Changes in Total Factor ProductivityPractical example: If the proportional change in TFP �A

Atwas

2%, the proportional change in output would be:�YYt

= �AAt

= 2%.


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Step 3: Derive the change in national income when all three inputsare changing simultaneously

Combining the previous results, if the capital stock, laborforce, and TFP are all changing simultaneously, theproportional growth rate of output is:

�Y

Yt= α�K

Kt+ (1 − α)�L

Lt+ �A

Atwhere

α�KKt

is the contribution of capital to the growth of output(1 − α)�L

Ltis the contribution of labor to the growth of output

�AAt

is the contribution of total factor productivity to thegrowth of output


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So, now we know the contribution of each input toward the growthof output. Why do we care?

Note that Kt and Lt are variables we can measure in reality.However, At is not directly observable.Therefore, by measuring the proportional growth rates of Yt ,Kt , and Lt , and by having a reasonable idea of the outputelasticity of capital α, we can solve for the proportional growthrate of At , known as the Solow residual because of itsunobservable nature.

(Intuitively, the Solow residual is the portion of growth leftunaccounted for by increases in the standard factors ofproduction.)


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OK, so why do we care about the size of TFP’s contribution togrowth?

TFP is an extremely broad but important measure of aneconomy’s well-being. It includes:

Innovations in building, machine, and other physicalconstructionInnovations in organization1. Private organization and management2. Government organization and regulationChanges in the degree of monopoly in the economyChanges in human capitalEtc.


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Growth Accounting

Figure: Growth Accounting - China


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Growth AccountingAdditional reading

Robert Solow (1957): “Technical Change and the AggregateProduction Function”


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BREAK

5-minute break


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Solow Model

As mentioned before:Growth accounting uses simple calculus and algebra to derivethe contributions of each input in the production function to acountry’s national output/income growth.


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Solow Model

In contrast, rather than deriving the contributions of growthsources using simple math, Solow (1956) built a model ofeconomic growth based on reasonable assumptions:

1 Made reasonable assumptions from the get-go about theform and contribution of particular growth inputs, includingTFP/capital/labor

2 Identified the intermediate implications of theseassumptions

3 Identified the final implications of these assumptions,including policy implications, which related to tax cuts,investment subsidies, etc.


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Solow Model

Solow later also tested his model with US data, with limitedsuccess.

We will repeat Steps (1)-(3) in building a model for each result weare interested in.

Note: These slides follow Jones (2002) closely.


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Solow ModelResult 1: Diminishing returns to capital per worker

Step 1: Make reasonable assumptions about inputs of growth

Let’s assume the same Cobb-Douglas production function asbefore, but without technology:

Yt = Kαt L1−α

t ,0 ≤ α ≤ 1

Let’s again assume constant returns to scale:cYt = (cKt)α(cLt)1−α


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We want to deal with per-capita (i.e. per-worker) variables. Iwill denote these with lower-case variables, in contrast withthe economy-wide upper-case variables.For example,

yt =YtLt

is output per worker in the economy.

Note: “Reasonable assumptions” in models include assumptionsabout behavior of variables or people (e.g. Yt has CRS), but alsoinclude descriptions of notation used (e.g. yt =

YtLt

).


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Step 2: Identify implications of the assumptions in Step 1

Plugging output per worker y = Y

Linto the production

function Yt = Kαt L1−α

t gives us the per-worker productionfunction

yt =Kα

t L1−αt

Lt= Kα

tLαt= kα

t

Conclusion: Returns to capital per worker ∂yt∂kt

arediminishing, since

∂yt∂kt

= ∂kαt

∂kt= αkα−1

t = αk

1−αt

decreases as kt increases.


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Solow ModelResult 2: Capital accumulation


Maintain all assumptions from Result 1 of the Solow model.


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Add the additional assumptions that:Agents invest/save some of their income:

K = sYt − δKtwhere

K ≡ ∂Kt∂t : Change in capital over time

s : Fraction of income Yt that an individual saves (constant)⇒ sYt : Income an individual saves at time tδ : Rate of depreciation of capital (constant)⇒ δKt : Level of depreciated capital at time t


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Add the additional assumptions that:The steady-state value of a variable is such that its partialderivative with respect to time equals zero.E.g. The steady-state value of Kt is the Kt such thatK ≡ ∂Kt

∂t = 0.E.g.2. In growth-accounting notation, K = �K .

Note: Intuitively, if a system is in steady state, all variables inthe system are in steady state, and their behavior will continueinto the future.


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Add the additional assumptions that:

Labor supply Lt grows at (constant) rate n: LtLt

= (dLt/dt)Lt

= n

Capital per worker kt ≡ KtLt

=⇒ log(kt) = log(Kt)− log(Lt)

=⇒ ktkt

= KtKt

− LtLt


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Plugging in definitions and equations from Step 1,ktkt

= KtKt

− LtLt

= sYt−δKtKt

− n= sYt

Kt− δ − n

Divide the first term by 1:ktkt

= (sYt/Lt)(Kt/Lt)

− δ − n


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Multiply both sides by kt :kt = syt − (δ + n)kt


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Solve for the steady-state (kt = 0) value of kt :kt = syt − (δ + n)kt = 0Plug in yt = kα

t :=⇒ k∗

t = ( sδ+n )

11−α

Now, plug in kt = y1−αt :

=⇒ y∗t = ( s

δ+n )α

1−α

Conclusion: Higher savings s implies higher income perworker yt .


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Solow Model

Other results:When the amount of investment per worker, sy , exceeds theamount needed to keep capital per worker constant, kt willincrease (“deepen”) over time.

E.g. Point kt = k0 in the Solow diagram [following slide]


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Solow ModelSolow Diagram


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Solow Model

Other results:The further an economy is below its steady-state value of kt ,the faster the economy grows.

E.g. Points kt < k∗ in the Transition Dynamics figure[following slide]


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Solow ModelTransition Dynamics


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Solow Model

Other results:Because the Solow diagram determines the steady-state valuek∗ of capital per worker, the production function yt = kα

t thendetermines the steady-state value y∗ of output per worker (asa function of k∗).

E.g. Because k∗, the steady-state value of kt , is the kt suchthat kt = syt − (δ + n)kt = 0,1. k∗ occurs at the junction of (n + δ)kt , and thus2. y∗ occurs where k∗ is the value of kt plugged into yt = kα

t[following slide]


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Solow ModelConsumption and Income Dynamics


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Solow Model

Other results:When consumers in an economy decide to increase thesavings/investment rate permanently, capital per worker willincrease, causing a higher per capita output.

E.g. When consumers permanently increase the savings ratefrom s to s �, the sy curve shifts up to s �y .This causes investment per worker at k∗ to exceed the amountrequired to keep capital per worker constant.Thus, capital deepening occurs until once again, investmentper worker equals the amount required to keep capital perworker constant (at k∗∗).


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Solow ModelIncrease in Savings


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Solow ModelConsumption and Savings


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Solow Model

Other results:If the (constant) population growth rate of the economyincreases from n to n� , the economy will have less capital perworker, and output per worker will thus decrease.

E.g. If the population growth rate increases from n to n�, the

(n + δ) curve shifts upward, causing investment per worker syto no longer be high enough to keep the capital-labor ratioconstant.Thus, the capital-labor ratio kt falls until it becomes constantagain (at k∗∗).[following slide]


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Solow ModelIncrease in Population


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Solow ModelReview of Results

The Solow model predicts:Countries that save more are wealthier:


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Solow ModelInvestment


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The Solow model predicts:Countries with higher population growth rates are poorer (dueto capital widening):


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Solow ModelPopulation


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The Solow model predicts:No long-run output/income growth per capita!

Not supported by data, of course.Q: What can we do to fix this prediction?

A: Add technology to the Solow Model!


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Solow Model + TechnologyResult 1: yt , kt , and At grow at the same rate


Maintain assumptions from the Solow Model withouttechnologyAdditionally, assume:

Technology level At exists, and its growth rate is: gAt =AtAt

The production function becomes: Yt = Kαt (AtLt)1−α

Note: Here, technology At is Harrod-neutral, and thus onlyincreases the efficiency of labor (not capital). At is alsoexogenous.


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Though the production function has changed, the capitalaccumulation equation is unchanged:

KtKt

= s YtKt

− δ

However, output per worker has changed, due to the additionof technology:

yt = kαA1−α

=⇒ The growth rate of output per worker:ytyt

= α ktkt

+ (1 − α) AtAt


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The capital accumulation equation, KtKt

= s YtKt

− δ, tells us that

the growth rate of capital KtKt

is constant only when YtKt

isconstant.

Implication: Output Yt and capital Kt must grow at the samerate.

Conclusion: yt and kt also grow at the same rate.


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If we let gyt = gkt be the growth rate for per-capita outputand capital,

Recall the growth rate of output per worker:ytyt

= α ktkt

+ (1 − α) AtAt

Plug in growth rates for each input:gyt = αgkt + (1 − α)gAt


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If we let gyt = gkt be the growth rate for per-capita outputand capital,

Substitute gyt = gkt and solve for gyt :gyt (1 − α) = (1 − α)gAt

gyt = gAt

Conclusion: Output and capital grow at the same rate as

technological progress.


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Solow Model + TechnologyResult 2: Increasing the savings rate only has a level effect on growth


Define the capital technology ratio: kt ≡ KtAtLt

≡ ktAt

and theoutput technology ratio: yt ≡ Yt

AtLt≡ yt

At.


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Plugging output per worker yt = kαt A1−α into the production

function Yt = Kαt (AtLt)1−α gives us the per-worker

production functionYt

AtLt= Kα

t (AtLt)1−α

AtLt= Kα

t(AL)α

⇐⇒ yt = kαt

Note: Compare this to the per-worker production functionwithout technology: yt =

Kαt L1−α

tLt

= Kαt

Lαt

= kαt


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Conclusion: Returns to effective capital per worker ∂yt∂kt

arediminishing, since

∂yt∂kt

= ∂kαt

∂kt= ∂(K/AL)α

∂(K/AL) = αkα−1t = α

k1−αt

decreases as kt increases.


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Solve for the steady-state (kt = 0) value of kt (construct thisas an exercise, using the without-technology case as anexample):˙kt = syt − (δ + n + gAt )kt = 0

Plug in yt = kαt :

=⇒ k∗t = ( s

δ+n+gAt)

11−α


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Solve for the steady-state (kt = 0) value of kt (construct thisas an exercise, using the without-technology case as anexample):

Now, plug in kt = y1−αt :

=⇒ y∗t = ( s

δ+n+gAt)

α1−α


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Conclusion 1: Higher savings/investment s implies a higherlevel of income/output per effective worker yt , but not ahigher growth rate of yt . [following slide]

Conclusion 2: Higher population growth n implies a lowerlevel of income/output per effective worker yt , but not alower growth rate of yt .


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Solow Model + TechnologyUnresolved Issues

1 What is technology and where does it come from? (See Romer1990)

2 Can technology really explain all differences? (See Lucas 1990)3 What factors of production are missing?


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Solow Model + TechnologyAdditional reading

Charles I. Jones, Introduction to Economic GrowthDavid Romer, Advanced MacroeconomicsHall and Jones (1999), “Why Do Some Countries Produce SoMuch More Output per Worker Than Others?”Lucas (1990), “Why Doesn’t Capital Flow from Rich to PoorerCountries?”Romer (1990), “Endogenous Technological Change”


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5-Minute Break

5-minute break


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Lewis Model

As mentioned before:Growth accounting uses simple calculus and algebra to derivethe contributions of each input in the production function to acountry’s national output/income growth.In contrast, rather than deriving the contributions of growthsources using simple math, Solow (1956) built a model ofeconomic growth based on reasonable assumptions aboutinputs into production.


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Lewis Model

As with the Solow model, Lewis (1954) built a model of how adeveloping economy moves from a traditional agricultural baseto a modern manufacturing-led economy, based on differentreasonable assumptions:

1 Made reasonable assumptions from the get-go about thenumber, type, and size of sectors in the economy, as well asthe wages offered in each sector

2 Identified the intermediate implications of theseassumptions

3 Identified the final implications of these assumptions,including policy implications


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Lewis Model

Step 1: Make reasonable assumptions about sectors in the economy

The economy is a dual sector economy, meaning it has 2sectors:

The subsistence sector (agriculture), which is characterized by:A. Lack of use of reproducible capital: wealth, such as moneyor property, accumulated for use in the production of morewealth. Here, land by itself is not reproducible capital.B. Low wagesC. An abundance of laborD. Low productivity and labor-intensive productionE. Hiring of “inside” workers (“self-employed sector”)


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Lewis Model


The economy is a dual sector economy, meaning it has 2sectors:

The capitalist sector (manufacturing), which is characterizedby:A. Use of reproducible capital, making investment possibleB. Higher wagesC. Higher productivity and capital-intensive productionD. Hiring of “outside” workers


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Lewis Model


Assume land is fixed.This causes the marginal product of labor in the agriculturalsector to diminish as the amount of labor on farms increases.As a result, the agricultural sector has a surplus ofunproductive labor.

(Note: Lewis also mentions women in the household andpopulation growth as sources of increasing unskilled laborsupply.)


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Lewis Model


For simplicity, assume the wage offered in the manufacturingsector is (more or less) fixed.

This leads firms in the manufacturing sector to make a positiveeconomic profit, because they will charge a price above thefixed wage rate.Assume that firms reinvest these positive profits in thebusiness in the form of additional fixed capital.


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For simplicity, assume the wage offered in the manufacturingsector is (more or less) fixed.

Because the manufacturing sector is growing, its wages will behigher relative to the agricultural sector, thus attracting theunproductive agricultural workers to the manufacturing sector.


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Because firms reinvest their positive profits in the business,manufacturing firms’ productive capacity continues to increase.

As a result, manufacturing firms will demand a greater amountof labor.As a result, more workers from the surplus of labor in theagricultural sector will be employed.

Because firms reinvest their positive profits in the business,this process will continue until all surplus labor from theagricultural sector has been employed.


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Conclusion: The manufacturing sector will continue to grow,and the economy will move from a traditional to anindustrialized one.


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Lewis ModelUnresolved Issues

1 What if firms don’t always reinvest all of their profits into fixedcapital?

2 What if firms reinvest their profits in fixed capital, but thatfixed capital is labor-saving, causing the demand for labor tofall?

3 What if the labor surplus in the agricultural sector hasdifficulty moving to the manufacturing sector?

4 What if wage levels are not fixed? Wouldn’t manufacturingwages increase, e.g. as a result of collective bargaining,causing manufacturing firms’ profits to fall, reinvestment todecrease, and thus demand less labor?


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Lewis ModelAdditional reading

Sir Arthur Lewis (1954), “Economic Development withUnlimited Supplies of Labor”


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5-Minute Break

5-minute break


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Recall from last week...


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Why Research?

There are many questions for which we do not have answers.E.g. Why does my father wear the same purple paisley necktieevery day?

Performing research is a formal way to ask questions andsearch for answers.

E.g. After interviewing my father, and searching his room, Ihave concluded that he wears a circus-clown necktie each daybecause it is the only one he owns.


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What Is an “Economic” Question?

Economic questions ask:1 How would an individual/group solve a particular problem, or

respond to a particular incentive?E.g. If the interest rate on a savings account increases by 5%,how much more would an individual save per month?

OR2 How would a particular variable respond to an exogenous

shock?E.g. How would the price of peanut butter increase in responseto an increase in the price of jelly?


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Pass Around Attendance Sheet

Pass around attendance sheet


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There are 5 steps in framing a research question:Step 1. Come up with an interesting, important, specificquestion

E.g. Do poor people in India work for lower wages if they haveinsufficient access to credit? (Jayachandran 2006)E.g.2. Do husbands treat wives with outside incomeopportunities better than wives without outside incomeopportunities? (Lundberg and Pollak 1996)E.g.3. Are there more terrorist attacks in conflict areas withless employment? (Berman 2010)E.g.4. Do fast-growing economies tend to slow down, andwhat are the policy implications? (Eichengreen et al. 2010)


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There are 5 steps in framing a research question:Step 1. Come up with an interesting, important, specificquestion

How?1. Do the course readings!2. Read economic magazines, newspapers, etc. (TheEconomist, Financial Times, NYT, etc.)3. Carry a small notebook at “all” times and write downinteresting observations.4. Read literature reviews in your areas of interest to see ifanyone has identified phenomena to study (e.g. “Civil War” byBlattman and Miguel, 2010)5. Come talk to us in office hours about your interests!


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There are 5 steps in framing a research question:

Step 2. Make sure your question answers:Who?What?When?Where? – and, if applicable,Why?


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Step 3. [Empirical paper only.] Make sure data exists that canhelp you answer your question.

E.g. Jayachandran (2006) found a panel data set of 257districts in India from 1956-1957, that contained informationon individuals’ wages, access to credit, “control variables,” andcrop yield (explained on next slide).

(Note: Control variables are independent variables that affect the

dependent variable, but not through your variable of interest. Here,

Jayachandran’s variable of interest was access to credit; her

dependent variable is individuals’ wage; and her “control variables”

could be age, gender, or other characteristics of the individual.)


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Step 4. Make sure you have a plan for how your data[empirical papers] or model [theoretical papers] could help youanswer your research question.

E.g. Jayachandran (2006): A correlation between access tocredit and agricultural wages may not mean that worse accessto credit causes an individual’s willingness to work for lowerwages, so Jayachandran couldn’t simply measure theco-movement between the two variables and draw a conclusion.

Instead, she cleverly used annual rainfall as a ’randomized’treatment on the need for credit: Rainfall is random, but itdetermines one’s crop yield, and thus agricultural income, andthus need for credit.


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E.g. Jayachandran (2006) [cont.]

By examining these random changes in the need for credit andsubsequent changes in the need for agricultural wage,conditional on the ’control variables,’ Jayachandran couldlegitimately argue for a causal effect of the need for credit onthe agricultural wage individuals are willing to work for.


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E.g.2. Lundberg and Pollak made specific assumptions to setup interlinking optimization problems for a husband and wifein a home.


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Step 5. Make sure you understand what dataanalysis/econometrics [empirical papers] or equilibriumconcepts [theoretical papers] you will need to perform in orderto show that your data/model provides a (potential) answer toyour question.

E.g. Jayachandran used multiple linear regression analysis withdistrict and year fixed effects.E.g.2. Lundberg and Pollak used comparative statics to solvethe husband and wife’s optimization problems.


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Other thoughts:Remember, you can either try to creatively extend existingwork, or come up with your own question.

Creative extension: Same data set, slightly different question;or same question, different data set.

For empirical Papers, it is common to both:First think of a question, and then search for a dataset thatcould answer it–ORFirst come across a dataset, and think of a question you couldanswer with it.Come talk to us in office hours if you unsure that yourapproach is “correct.”


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Summary

China is, and will continue to be, an economy to study andunderstand.Economic growth models

Growth accounting uses simple calculus and algebra to identifythe contributions of each input in the productionfunction–technology, capital, and labor–to a country’s nationaloutput/income.


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Summary

Economic growth modelsThe Solow model makes particular assumptions about thefactors of production–technology, capital, and labor–which leadto predictions that:

1. A higher savings/investment implies a higher level ofincome/output per (effective) worker, but not a higher growthrate of output.

2. A higher population growth implies a lower level ofincome/output per effective worker, but not a lower growthrate of output.


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Economic growth modelsThe Lewis model makes particular assumptions about thenumber, type, and size of sectors in the economy, as well asthe wages offered in each sector, which leads to the predictionthat:

By advancing its capitalist sector, a developing economymoves from a traditional agricultural base to a modernmanufacturing-led economy.


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Summary

How to frame an economics research question: 5 steps:

Step 1. Come up with an interesting, important, specificquestion

Step 2. Make sure your question answers: Who? What?When? Where? – and, if applicable, Why?

Step 3. [Empirical paper only.] Make sure data exists that canhelp you answer your question.


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Summary

How to frame an economics research question: 5 steps:


Step 5. Make sure you understand what dataanalysis/econometrics [empirical papers] or equilibriumconcepts [theoretical papers] you will need to perform in orderto show that your data/model provides a (potential) answer toyour question.


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Next week is Guest Lecture 1: Barry Eichengreen, “TheChinese Economy: Growth and Slowdown”=> Finish reading these papers!

Sign up for Twitter feed!Sign up for GSI OH to discuss paper topic!

https://docs.google.com/spreadsheet/ccc?key=0AujH9yk8ZzyodEM0TC1zVmhBOV9NWGJfU0oyN2ZEdnc(Feel free to sign up right now on my computer.)


background for barry eichengreen’s jan. 31 lecture: …webfac/eichengreen/e191_sp12/...2012/01/24...

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