chapter two roots and branches chapter 2 traces the history of economic growth theory begins with...
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Chapter TwoChapter Two
ROOTS AND BRANCHESROOTS AND BRANCHES
Chapter 2Chapter 2
Traces the Traces the historyhistory of economic growth of economic growth theorytheory
Begins with Adam Smith who started it Begins with Adam Smith who started it allall
Shows how Smith’s theory evolved, and Shows how Smith’s theory evolved, and culminated in the Harrod-Domar model culminated in the Harrod-Domar model
Explains why Solow rebelled against Explains why Solow rebelled against classical growth theory … classical growth theory …
… … and why and how endogenous-growth and why and how endogenous-growth theory came abouttheory came about
Outline
Roots and BranchesRoots and Branches
The proximate causes of economic growth are the The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, effort to economize, the accumulation of knowledge, and the accumulation of capital.and the accumulation of capital.
ARTHUR LEWISARTHUR LEWIS
To change the rate of growth of real output per head To change the rate of growth of real output per head you have to change the rate of technical progress.you have to change the rate of technical progress.
ROBERT SOLOWROBERT SOLOW
The proximate causes of economic growth are the The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, effort to economize, the accumulation of knowledge, and the accumulation of capital.and the accumulation of capital.
ARTHUR LEWISARTHUR LEWIS
To change the rate of growth of real output per head To change the rate of growth of real output per head you have to change the rate of technical progress.you have to change the rate of technical progress.
ROBERT SOLOWROBERT SOLOW
The first revolution: The first revolution: Adam SmithAdam Smith
Theory of wealth Theory of wealth creation, public creation, public policy, and policy, and economic growtheconomic growth
Theory of wealth Theory of wealth creation, public creation, public policy, and policy, and economic growtheconomic growth
SavingSaving and and investmentinvestment are are by-products by-products and precursors and precursors of domestic of domestic and foreign and foreign tradetrade
SavingSaving and and investmentinvestment are are by-products by-products and precursors and precursors of domestic of domestic and foreign and foreign tradetrade
size of the marketsize of the marketsize of the marketsize of the market
division of labourdivision of labourdivision of labourdivision of labour
efficiencyefficiencyefficiencyefficiency
The first revolution:The first revolution:Adam SmithAdam Smith
Saving and investment stimulate Saving and investment stimulate growthgrowth
direct effects through direct effects through accumulationaccumulationof capitalof capital
indirect effects through indirect effects through labour labour productivityproductivity
further indirect effects through further indirect effects through interaction with interaction with exchange and exchange and trade, trade, through foreign investmentthrough foreign investment
domestic marketdomestic market can take the place can take the place of foreign marketsof foreign markets
Saving and investment stimulate Saving and investment stimulate growthgrowth
direct effects through direct effects through accumulationaccumulationof capitalof capital
indirect effects through indirect effects through labour labour productivityproductivity
further indirect effects through further indirect effects through interaction with interaction with exchange and exchange and trade, trade, through foreign investmentthrough foreign investment
domestic marketdomestic market can take the place can take the place of foreign marketsof foreign markets
The first revolution: The first revolution: Adam SmithAdam Smith
Smith’s reference to ‘Smith’s reference to ‘private private misconductmisconduct’ and the ‘’ and the ‘publick publick extravaganceextravagance of government’ of government’
Distinction between Distinction between quantity quantity and and qualityquality
Mutual advantages of Mutual advantages of tradetrade and and growth, growth, links to links to geographygeography
Smith’s reference to ‘Smith’s reference to ‘private private misconductmisconduct’ and the ‘’ and the ‘publick publick extravaganceextravagance of government’ of government’
Distinction between Distinction between quantity quantity and and qualityquality
Mutual advantages of Mutual advantages of tradetrade and and growth, growth, links to links to geographygeography
The first revolution:The first revolution:Adam SmithAdam Smith
Benefits from division of labourBenefits from division of labourBenefits from division of labourBenefits from division of labour
If If specializationspecialization increases efficiency increases efficiencyand wealth and, thereby, economicand wealth and, thereby, economicgrowth, then ...growth, then ...
If If specializationspecialization increases efficiency increases efficiencyand wealth and, thereby, economicand wealth and, thereby, economicgrowth, then ...growth, then ...
... just about ... just about anythinganything that increases that increases efficiencyefficiency by the same amount, other things by the same amount, other things being equal, should be expected to have the being equal, should be expected to have the same effect on growth.same effect on growth.
... just about ... just about anythinganything that increases that increases efficiencyefficiency by the same amount, other things by the same amount, other things being equal, should be expected to have the being equal, should be expected to have the same effect on growth.same effect on growth.
The first revolution:The first revolution:Adam SmithAdam Smith
Benefits from division of labourBenefits from division of labourBenefits from division of labourBenefits from division of labour
The effort to economizeThe effort to economizeThe effort to economizeThe effort to economize
... all... all other equivalent means of other equivalent means of increasing the increasing the efficiency efficiency oror quality quality of labour, capital, and land should be of labour, capital, and land should be expected to affect economic growth in the expected to affect economic growth in the same way.same way.
... all... all other equivalent means of other equivalent means of increasing the increasing the efficiency efficiency oror quality quality of labour, capital, and land should be of labour, capital, and land should be expected to affect economic growth in the expected to affect economic growth in the same way.same way.
So, if So, if foreign tradeforeign trade enlarges the enlarges themarket and thus facilitates further market and thus facilitates further division of labour à la Smith, thereby division of labour à la Smith, thereby increasing wealth and growth, then ...increasing wealth and growth, then ...
So, if So, if foreign tradeforeign trade enlarges the enlarges themarket and thus facilitates further market and thus facilitates further division of labour à la Smith, thereby division of labour à la Smith, thereby increasing wealth and growth, then ...increasing wealth and growth, then ...
Arthur Lewis
The first revolution:The first revolution:Adam SmithAdam Smith
Smith on education, efficiency, and growthSmith on education, efficiency, and growth
Distinction between the Distinction between the quantity quantity andand quality quality of of labour labour education, by increasing labour education, by increasing labour productivity, increases also efficiency and productivity, increases also efficiency and growthgrowth
Smith feared the economic, political, and social Smith feared the economic, political, and social consequences of consequences of inferior educationinferior education among the among the massesmasses
He favoured He favoured public supportpublic support for education for education
Smith on education, efficiency, and growthSmith on education, efficiency, and growth
Distinction between the Distinction between the quantity quantity andand quality quality of of labour labour education, by increasing labour education, by increasing labour productivity, increases also efficiency and productivity, increases also efficiency and growthgrowth
Smith feared the economic, political, and social Smith feared the economic, political, and social consequences of consequences of inferior educationinferior education among the among the massesmasses
He favoured He favoured public supportpublic support for education for education
The first revolution:The first revolution:Adam Smith - Summing upAdam Smith - Summing up
Economic growth = increase in the Economic growth = increase in the quantity and quality of the three quantity and quality of the three main factors of production: main factors of production: labourlabour, , capitalcapital, and , and landland
Growth accountingGrowth accounting is based on this is based on this classificationclassification
Two shortcomings:Two shortcomings:
quantity of quantity of landland
increase in the increase in the labour forcelabour force does not does not
reallyreally
count as a source of economic growthcount as a source of economic growth
Economic growth = increase in the Economic growth = increase in the quantity and quality of the three quantity and quality of the three main factors of production: main factors of production: labourlabour, , capitalcapital, and , and landland
Growth accountingGrowth accounting is based on this is based on this classificationclassification
Two shortcomings:Two shortcomings:
quantity of quantity of landland
increase in the increase in the labour forcelabour force does not does not
reallyreally
count as a source of economic growthcount as a source of economic growth
Adam Smith’s followersAdam Smith’s followers
Distribution of wealth and foreign Distribution of wealth and foreign tradetradeDistribution of wealth and foreign Distribution of wealth and foreign tradetrade
David RicardoDavid RicardoDavid RicardoDavid Ricardo
Thomas MalthusThomas MalthusThomas MalthusThomas Malthus
Question of populationQuestion of populationQuestion of populationQuestion of population
Adam Smith’s followersAdam Smith’s followers
John Stuart MillJohn Stuart Mill
rejected Malthus’s prediction rejected Malthus’s prediction that population would that population would outgrow productive capacityoutgrow productive capacity
more and better education more and better education would restrain population would restrain population growthgrowth
distribution a different matter distribution a different matter than production but can be than production but can be changed through policychanged through policy
John Stuart MillJohn Stuart Mill
rejected Malthus’s prediction rejected Malthus’s prediction that population would that population would outgrow productive capacityoutgrow productive capacity
more and better education more and better education would restrain population would restrain population growthgrowth
distribution a different matter distribution a different matter than production but can be than production but can be changed through policychanged through policy
Adam Smith’s followersAdam Smith’s followers
Karl MarxKarl Marx
Economic mechanisms Economic mechanisms driving production and driving production and distribution are closely distribution are closely relatedrelated
The limits to growth observed The limits to growth observed by Malthus are inescapable by Malthus are inescapable ‘technological ‘technological unemployment’unemployment’
Karl MarxKarl Marx
Economic mechanisms Economic mechanisms driving production and driving production and distribution are closely distribution are closely relatedrelated
The limits to growth observed The limits to growth observed by Malthus are inescapable by Malthus are inescapable ‘technological ‘technological unemployment’unemployment’
Adam Smith’s followersAdam Smith’s followers
Alfred MarshallAlfred Marshall
organizationorganization as a fourth factor of as a fourth factor of productionproduction
made explicit the connection made explicit the connection between between educationeducation and growth and growth
distributiondistribution of income and wealth of income and wealth matters for efficiency and growthmatters for efficiency and growth
Alfred MarshallAlfred Marshall
organizationorganization as a fourth factor of as a fourth factor of productionproduction
made explicit the connection made explicit the connection between between educationeducation and growth and growth
distributiondistribution of income and wealth of income and wealth matters for efficiency and growthmatters for efficiency and growth
‘‘Knowledge is our most powerful engine Knowledge is our most powerful engine of production ... Organization aids of production ... Organization aids knowledge’knowledge’
Adam Smith’s followersAdam Smith’s followers
Joseph SchumpeterJoseph Schumpetertechnology through technology through inventioninvention, , innovationinnovation, and , and entrepreneurshipentrepreneurship
rent-seekers motivated by monopoly rent-seekers motivated by monopoly profitsprofits
perfectly competitive markets … may not perfectly competitive markets … may not be very conducive to economic growthbe very conducive to economic growth
No rent to capture under perfect No rent to capture under perfect competitioncompetition
Static efficiency does not go along with Static efficiency does not go along with dynamic efficiency, but ...dynamic efficiency, but ...
Joseph SchumpeterJoseph Schumpetertechnology through technology through inventioninvention, , innovationinnovation, and , and entrepreneurshipentrepreneurship
rent-seekers motivated by monopoly rent-seekers motivated by monopoly profitsprofits
perfectly competitive markets … may not perfectly competitive markets … may not be very conducive to economic growthbe very conducive to economic growth
No rent to capture under perfect No rent to capture under perfect competitioncompetition
Static efficiency does not go along with Static efficiency does not go along with dynamic efficiency, but ...dynamic efficiency, but ...
Adam Smith’s followersAdam Smith’s followers
John Maynard KeynesJohn Maynard KeynesJohn Maynard KeynesJohn Maynard Keynes
Accumulation of capitalAccumulation of capital
‘‘Science and technical inventions’Science and technical inventions’
‘I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years.’
Enter mathematics: Enter mathematics: Harrod and DomarHarrod and Domar
Paul Samuelson’sPaul Samuelson’s
Foundations of Economic AnalysisFoundations of Economic Analysis (1948)(1948)laid the basis for mathematical economics, including laid the basis for mathematical economics, including
the modelling of ...the modelling of ...
... dynamic interactions among macroeconomic ... dynamic interactions among macroeconomic variablesvariables
Paul Samuelson’sPaul Samuelson’s
Foundations of Economic AnalysisFoundations of Economic Analysis (1948)(1948)laid the basis for mathematical economics, including laid the basis for mathematical economics, including
the modelling of ...the modelling of ...
... dynamic interactions among macroeconomic ... dynamic interactions among macroeconomic variablesvariables
New lines of thought New lines of thought
Enter mathematics: Enter mathematics: Harrod and DomarHarrod and Domar
Net investment equals the increase in the capital stockNet investment equals the increase in the capital stockNet investment equals the increase in the capital stockNet investment equals the increase in the capital stock
… … net of depreciation due to net of depreciation due to physicalphysical or or economiceconomic wear and tear wear and tear… … net of depreciation due to net of depreciation due to physicalphysical or or economiceconomic wear and tear wear and tear
High level of investment entails High level of investment entails an increasing level of the capital an increasing level of the capital stockstock
High level of investment entails High level of investment entails an increasing level of the capital an increasing level of the capital stockstockHigh levels of saving and investment are good for High levels of saving and investment are good for growth even if they are stationary, that is, not growth even if they are stationary, that is, not increasingincreasing
High levels of saving and investment are good for High levels of saving and investment are good for growth even if they are stationary, that is, not growth even if they are stationary, that is, not increasingincreasingBy continuously augmenting the capital By continuously augmenting the capital stock ...stock ...By continuously augmenting the capital By continuously augmenting the capital stock ...stock ...
… … even even stationarystationary levels of saving and levels of saving and investment relative to output drive output investment relative to output drive output higher and higherhigher and higher, thus generating , thus generating economic growtheconomic growth
… … even even stationarystationary levels of saving and levels of saving and investment relative to output drive output investment relative to output drive output higher and higherhigher and higher, thus generating , thus generating economic growtheconomic growth
Enter mathematics: Enter mathematics: Harrod and DomarHarrod and Domar
Efficiency is crucial for growthEfficiency is crucial for growthEfficiency is crucial for growthEfficiency is crucial for growth
High level of efficiency stimulates growth High level of efficiency stimulates growth by ...by ...High level of efficiency stimulates growth High level of efficiency stimulates growth by ...by ...
… … amplifying the effects of a given level of amplifying the effects of a given level of saving and investment on the rate of growth of saving and investment on the rate of growth of outputoutput
… … amplifying the effects of a given level of amplifying the effects of a given level of saving and investment on the rate of growth of saving and investment on the rate of growth of outputoutput
All that is required is a steady All that is required is a steady accumulation of capital through accumulation of capital through saving and investmentsaving and investment
All that is required is a steady All that is required is a steady accumulation of capital through accumulation of capital through saving and investmentsaving and investment
A given level of efficiency, including the A given level of efficiency, including the state of technology will, then translate state of technology will, then translate the capital accumulation into economic the capital accumulation into economic growthgrowth
A given level of efficiency, including the A given level of efficiency, including the state of technology will, then translate state of technology will, then translate the capital accumulation into economic the capital accumulation into economic growthgrowth
Enter mathematics: Enter mathematics: Harrod and DomarHarrod and Domar
HarrodHarrod and and Domar Domar expressed the expressed the dynamic relationshipdynamic relationship between between saving, efficiency, and growth in a saving, efficiency, and growth in a simple equation which ...simple equation which ...
HarrodHarrod and and Domar Domar expressed the expressed the dynamic relationshipdynamic relationship between between saving, efficiency, and growth in a saving, efficiency, and growth in a simple equation which ...simple equation which ...
The Harrod-Domar model The Harrod-Domar model The Harrod-Domar model The Harrod-Domar model
... neatly formalized, simplified, and ... neatly formalized, simplified, and summarized the essence of almost 200 summarized the essence of almost 200
years’ theorizing about economic growthyears’ theorizing about economic growth
... neatly formalized, simplified, and ... neatly formalized, simplified, and summarized the essence of almost 200 summarized the essence of almost 200
years’ theorizing about economic growthyears’ theorizing about economic growth
The Harrod-Domar modelThe Harrod-Domar model
Economic growth depends on Economic growth depends on three factors:three factors:
A.A. the saving rate the saving rate
B.B. the capital/output ratio the capital/output ratio
C.C. the depreciation rate the depreciation rate
Economic growth depends on Economic growth depends on three factors:three factors:
A.A. the saving rate the saving rate
B.B. the capital/output ratio the capital/output ratio
C.C. the depreciation rate the depreciation rate
So, it is essentially all here, from Adam So, it is essentially all here, from Adam Smith onwards, in a single, simple Smith onwards, in a single, simple equation: Growth depends on saving equation: Growth depends on saving and efficiency, including depreciationand efficiency, including depreciation
So, it is essentially all here, from Adam So, it is essentially all here, from Adam Smith onwards, in a single, simple Smith onwards, in a single, simple equation: Growth depends on saving equation: Growth depends on saving and efficiency, including depreciationand efficiency, including depreciation
The Harrod-Domar modelThe Harrod-Domar model
Shortcomings:Shortcomings:Neither theory nor empirical evidence Neither theory nor empirical evidence
seemed to provide much support for the seemed to provide much support for the capital/output ratio as an capital/output ratio as an exogenous exogenous behavioural parameterbehavioural parameter in the model in the model
a more elaborate formulation of the link a more elaborate formulation of the link between capital and output was called forbetween capital and output was called for
The model did not leave much room for the The model did not leave much room for the other crucial factor of production, other crucial factor of production, labourlabour
population or labour-force growth is absent population or labour-force growth is absent from the formula, which explains output from the formula, which explains output growth solely by growth solely by savingsaving and and efficiencyefficiency
Shortcomings:Shortcomings:Neither theory nor empirical evidence Neither theory nor empirical evidence
seemed to provide much support for the seemed to provide much support for the capital/output ratio as an capital/output ratio as an exogenous exogenous behavioural parameterbehavioural parameter in the model in the model
a more elaborate formulation of the link a more elaborate formulation of the link between capital and output was called forbetween capital and output was called for
The model did not leave much room for the The model did not leave much room for the other crucial factor of production, other crucial factor of production, labourlabour
population or labour-force growth is absent population or labour-force growth is absent from the formula, which explains output from the formula, which explains output growth solely by growth solely by savingsaving and and efficiencyefficiency
Proved fatal Proved fatal to the Harrod-to the Harrod-Domar Domar model, as model, as Solow was to Solow was to show in 1956, show in 1956, or so it or so it seemedseemed
The second The second revolution: revolution: The The neoclassical modelneoclassical model
Even so, saving and efficiency play an important role for growth over long periods, that is, the medium term
Economic growth was considered immune to economic policy, good or bad
According to Solow, saving behaviour was no longer relevant for long-run growth, nor was efficiency in a broad sense, except insofar as it mattered for technology
Since population growth is basically a demographic phenomenon and, hence, exogenous from an economic point of view, it must follow that economic growth is also
exogenous
The second revolution:The second revolution:The neoclassical modelThe neoclassical model
… but also with a constant rate of growth of output per capita, a constant rate of interest, and a constant distribution of national income between labour and capital, all of which seemed to apply to the real world
Once attained, the long-run equilibrium is consistent with not only a constant capital/output ratio
… is better viewed as an endogenous variable, which moves over time and ultimately reaches long-run equilibrium
Solow showed how the capital/output ratio, rather than being exogenously fixed as in the Harrod-Domar
model,
The second The second revolution:revolution:The neoclassical modelThe neoclassical model
Growth is exogenous because its two main Growth is exogenous because its two main determinants, determinants, population growthpopulation growth and and technological progresstechnological progress, are exogenous, are exogenous
He treated the capital/output ratio as an endogenous variable that adjusts over time to the exogenously given growth rate of output
Solow reversed the roles of the rate of growth and the capital/output ratio
… possible to view growth as an endogenous variable: growth adjusts to the exogenously given capital/output ratio
The capital/output ratio is exogenous
The third revolution:The third revolution:Endogenous growthEndogenous growth
The neoclassical growth model seemed unable to answer The neoclassical growth model seemed unable to answer some burning questions about economic growthsome burning questions about economic growth
Is Is technological changetechnological change exogenous from an economic exogenous from an economic point of view?point of view?
Do economists really have nothing to say about economic Do economists really have nothing to say about economic growth in the long run?growth in the long run?
If output per capita grows at a rate that depends If output per capita grows at a rate that depends solely on - in fact, is equal to - the rate of solely on - in fact, is equal to - the rate of technological progresstechnological progress, then why is it that the , then why is it that the growth growth performance of different countriesperformance of different countries differs so radically differs so radically over long periods?over long periods?
What does the neoclassical model tell us about What does the neoclassical model tell us about relative relative growth performancegrowth performance anyway? anyway?
The neoclassical growth model seemed unable to answer The neoclassical growth model seemed unable to answer some burning questions about economic growthsome burning questions about economic growth
Is Is technological changetechnological change exogenous from an economic exogenous from an economic point of view?point of view?
Do economists really have nothing to say about economic Do economists really have nothing to say about economic growth in the long run?growth in the long run?
If output per capita grows at a rate that depends If output per capita grows at a rate that depends solely on - in fact, is equal to - the rate of solely on - in fact, is equal to - the rate of technological progresstechnological progress, then why is it that the , then why is it that the growth growth performance of different countriesperformance of different countries differs so radically differs so radically over long periods?over long periods?
What does the neoclassical model tell us about What does the neoclassical model tell us about relative relative growth performancegrowth performance anyway? anyway?
The third revolution:The third revolution:Endogenous growthEndogenous growth
Do poor countries grow more Do poor countries grow more rapidly than rich countries?rapidly than rich countries?
What is the empirical What is the empirical evidence?evidence?
Do poor countries grow more Do poor countries grow more rapidly than rich countries?rapidly than rich countries?
What is the empirical What is the empirical evidence?evidence?
Called for new Called for new thinking about thinking about economic growtheconomic growth
Called for new Called for new thinking about thinking about economic growtheconomic growth
The third revolution:The third revolution:Endogenous growthEndogenous growth
Key idea Key idea
TechnologyTechnology is probably not exogenousis probably not exogenous
More probablyMore probably
Technology depends on Technology depends on economic factorseconomic factors: the : the amount of capital available to workers - the amount of capital available to workers - the capital/labour ratiocapital/labour ratio
Key idea Key idea
TechnologyTechnology is probably not exogenousis probably not exogenous
More probablyMore probably
Technology depends on Technology depends on economic factorseconomic factors: the : the amount of capital available to workers - the amount of capital available to workers - the capital/labour ratiocapital/labour ratio
The capital/output ratio turns The capital/output ratio turns out to be a constant after allout to be a constant after all
The third revolution:The third revolution:Endogenous growthEndogenous growth
Economic growth free to respond to Economic growth free to respond to changes in changes in saving saving and and efficiencyefficiency, and , and depreciationdepreciation, even in the long run, even in the long run
The Harrod-Domar model has thus been The Harrod-Domar model has thus been restoredrestored
Endogenous technology makes economic Endogenous technology makes economic growth also growth also endogenousendogenous
Economic growth free to respond to Economic growth free to respond to changes in changes in saving saving and and efficiencyefficiency, and , and depreciationdepreciation, even in the long run, even in the long run
The Harrod-Domar model has thus been The Harrod-Domar model has thus been restoredrestored
Endogenous technology makes economic Endogenous technology makes economic growth also growth also endogenousendogenous
Throws all windows wide Throws all windows wide openopenThrows all windows wide Throws all windows wide openopen
The third revolution:Endogenous growth and development
The effort to economize
Accumulation of knowledge
Accumulation of capital
Economic growth responds to economic policy
Economic growth obeys the same laws as economic development
Arthur Lewis
The third revolution:The third revolution:Endogenous growth - SummaryEndogenous growth - Summary
Growth theory and the origins of economics
Classical economists: viewed Classical economists: viewed economic growth as economic growth as endogenousendogenous
The classical view was neatly summarized in a simple equation by Harrod and DomarSolow: economic growth depends on technology, and is exogenous in the long runEconomic theorists went back to their drawing boards, and re-endogenized growth
Questions for reviewQuestions for review
1.1. Suppose foreign trade stimulates economic Suppose foreign trade stimulates economic growth as argued by Adam Smith, other things growth as argued by Adam Smith, other things being equal. Does it follow that large countries being equal. Does it follow that large countries with limited trade with the rest of the world with limited trade with the rest of the world should be expected to grow less rapidly than should be expected to grow less rapidly than small countries with extensive foreign trade?small countries with extensive foreign trade?
Why not?Why not?
2.2. ‘A high saving rate ensures rapid economic ‘A high saving rate ensures rapid economic growth.’ Is this statement true or false? Discuss.growth.’ Is this statement true or false? Discuss.
1.1. Suppose foreign trade stimulates economic Suppose foreign trade stimulates economic growth as argued by Adam Smith, other things growth as argued by Adam Smith, other things being equal. Does it follow that large countries being equal. Does it follow that large countries with limited trade with the rest of the world with limited trade with the rest of the world should be expected to grow less rapidly than should be expected to grow less rapidly than small countries with extensive foreign trade?small countries with extensive foreign trade?
Why not?Why not?
2.2. ‘A high saving rate ensures rapid economic ‘A high saving rate ensures rapid economic growth.’ Is this statement true or false? Discuss.growth.’ Is this statement true or false? Discuss.
Questions for reviewQuestions for review
3.3. Explain how more and better education affects Explain how more and better education affects (a) the level of per capita GNP in the long run (a) the level of per capita GNP in the long run and (b) its long-run rate of growth according toand (b) its long-run rate of growth according to
I. the Harrod-Domar model;I. the Harrod-Domar model;
II. the Solow model;II. the Solow model;
III. the endogenous-growth model.III. the endogenous-growth model.
4.4. Why does increased depreciation of capital Why does increased depreciation of capital reduce economic growth, other things being reduce economic growth, other things being equal? Does it matter whether the depreciation equal? Does it matter whether the depreciation is physical or economic? - i.e. whether it results is physical or economic? - i.e. whether it results from physical wear and tear or from low-quality from physical wear and tear or from low-quality investment decisions in the past.investment decisions in the past.
Classroom Classroom discussiondiscussion