Chapter 8

Income Disparity Among

Countries and

Endogenous Growth

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Chapter 8 Topics

• Convergence

• Endogenous growth: a model of human capital accumulation

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Convergence in the Solow Growth Model

• If two countries are initially rich and poor, but identical in all other respects, they will converge in the long run to the same level and rate of growth of per-capita income.

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Figure 8.1Rich and Poor Countries and the Steady State

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Figure 8.2Convergence in Income per Worker Across Countries in the Solow Growth Model

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Figure 8.3Convergence in Aggregate Output Across Countries in the Solow Growth Model

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Figure 8.4Differences in Total Factor Productivity Can Explain Disparity in Income per Worker Across Countries

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Endogenous Growth: A Model of Human Capital Accumulation

• In this model, the growth rate of per capita income is determined by the efficiency with which human capital is accumulated, and the fraction of available time devoted to human capital accumulation.

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Consumer Behavior

Consumption is equal to total wage income.

swuHC

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Human Capital Accumulation

• Future human capital depends on current human capital and time devoted to training and education.

ss HubH )1('

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Production Function

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Firm’s Profits

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Figure 8.5Determination of the Equilibrium Real Wage in the Endogenous Growth Model

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Equilibrium Consumption

zuHC

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Human Capital Growth

Human capital evolves in equilibrium according to:

HubH )1('

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Equilibrium Human Capital Growth

Equilibrium growth rate of human capital:

1)1(1'

ubH

H

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Figure 8.6Human Capital Accumulation in the Endogenous Growth Model

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Figure 8.7Effect of a Decrease in u on the Consumption Path in the Endogenous Growth Model

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Figure 8.8No Convergence in the Endogenous Growth Model