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1、4-14-2Chapter4Growth and PolicyItem ItemItemEtc.McGraw-Hill/IrwinMacroeconomics, 10e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.4-3IntroductionChapter 3 explained how GDP and GDP growth are determined by the savings rate, rate of population growth, and the rate of technological progre

2、ssThe question analyzed in this chapter is “How do societys choices affect these parameters?”In many developed countries, invention and advances in technology are the key determinants of growthTechnological advances are much less important for poor countries more important to invest in human and phy

3、sical capital and borrow technological advances from othersEndogenous growth theory (Romer, Lucas) explains how societys choices lead to technological progress and growth4-4Trouble With Neoclassical Growth TheoryBy the late 1980s there was great dissatisfaction with neoclassical growth theory since:

4、It does not explain the economic determinants of technological progressIt predicts that economic growth and savings rates are uncorrelated in the steady stateEndogenous growth theory emphasizes different growth opportunities in physical and knowledge capitalDiminishing marginal returns to physical c

5、apital, but perhaps not knowledge capitalThe idea that increased investment in human capital increases growth is key to linking higher savings rates to higher equilibrium growth rates4-5Mechanics of Endogenous GrowthNeed to modify the production function to allow for self-sustaining, endogenous grow

6、thFigure 4-1 (a) shows the Solow growth diagram, with the steady state at point C where savings equals required investmentIf savings above required investment, economy is growing as more capital is added process continues until savings equals required investment (reach the steady state)Insert Figure

7、 4-1 (a) and (b) here4-6Mechanics of Endogenous GrowthNeed to modify the production function to allow for self-sustaining, endogenous growthFigure 4-1 (a) shows the Solow growth diagram, with the steady state at point C where savings equals required investmentDue to the diminishing MPK, the producti

8、on function and savings function flatten out and cross the upward sloping required investment line onceInsert Figure 4-1 (a) and (b) here, again4-7Mechanics of Endogenous GrowthNeed to modify the production function to allow for self-sustaining, endogenous growthEconomy illustrated in Figure 4-1 (b)

9、 is described by a production function with a constant MPK: Y = aK (1)K is the only factor, a is the MPKProduction function and savings curve e straight lines, and are always greater than required investment the higher the savings rate, the bigger the gap between savings and required investment = fa

10、ster the growthInsert Figure 4-1 (a) and (b) here, again4-8Mechanics of Endogenous GrowthIf the savings rate, s, is constant and there is neither population growth nor depreciation of capital, then the change in the capital stock is defined as: (2) Growth rate of capital is proportional to the savin

11、gs rateOutput is proportional to capital, thus the growth rate of output is (3) The higher s, the higher the growth rate of output 4-9Deeper Economics of Endogenous GrowthEliminating diminishing marginal returns to capital runs against prevailing microeconomic principlesIf there are constant returns

12、 to capital alone, there will be increasing returns to scale to all factors taken together larger and larger firms e increasingly efficient, and should see a single firm dominate the entire economyNot realistic, so need to eliminate the possibility of increasing returns to scale to all factors, and

13、constant returns to a single factorAlternatively, a single firm may not capture all benefits of capital some external to the firm (Romer)When a firm increases K, firms production increases, but so does the productivity of other firmsAs long as private return has constant returns to all factors, ther

14、e will be no tendency towards monopolization4-10Private vs. Social Returns to CapitalInvestment produces not only new machines, but also new ways of doing thingsFirms DO capture the production benefits of a new machine (PRIVATE RETURNS)Firms may NOT capture the benefits of new technologies and ideas

15、, since they are easy to copy (SOCIAL RETURNS)Endogenous growth theory hinges on the notion that there are substantial external returns to capitalNot realistic for physical capital, but quite for human capital:Contribution of new knowledge only partially captured by creatorFrom one new idea springs

16、another knowledge can grow indefinitely4-11N and the Endogenous Growth ModelAssume:Technology is proportional to the level of capital per worker, or Technology is labor augmenting,Technology growth depends on capital growth, orThe GDP growth equation from Chapter 3 wasIf , then Deriving the growth e

17、quations requires some algebra . . . Output and capital growat the same rate.4-12N and the Endogenous Growth ModelAssume:Technology is proportional to the level of capital per worker, or Technology is labor augmenting,Technology growth depends on capital growth, orSince the numerator and denominator

18、 of y/k grow at equal rates, y/k is constantWhat is that constant? Find by dividing the production function by K and simplifying: Deriving the growth equations requires some algebra . . . 4-13N and the Endogenous Growth ModelAssume:Technology is proportional to the level of capital per worker, or Te

19、chnology is labor augmenting,Technology growth depends on capital growth, orThe equation for capital accumulation can be written as: Making the substitution for y/k, the growth rate of y and k es: Deriving the growth equations requires some algebra . . . High rates of population growth and depreciat

20、ion lead to a low growth rate.4-14ConvergenceDo economies with different initial levels of output eventually grow to equal standards of living or converge?Neoclassical growth theory predicts absolute convergence for economies with equal rates of saving and population growth and with access to the sa

21、me technology should all reach the same steady state level of eConditional convergence is predicted for economies with different rates of savings and/or population growth steady state level of e will differ, but the growth rates will eventually convergeEndogenous growth theory predicts that a high s

22、avings rate leads to a high growth rate4-15ConvergenceDo economies with different initial levels of output eventually grow to equal standards of living or converge?Robert Barro tested these competing theories, and found that:Countries with higher levels of investment tend to grow fasterThe impact of

23、 higher investment on growth is however transitoryCountries with higher investment will end in a steady state with higher per capita e, but not with a higher growth rateCountries do appear to converge conditionally, and thus endogenous growth theory is not very useful for explaining international di

24、fferences in growth rates4-16Growth Traps and Two Sector ModelsHow do we explain a world with BOTH no growth AND high growth countries?Ghana is an example of an economy that has experienced no growth since 1900China is an example of an economy that has experienced rapid growth in recent years Need a

25、 model in which there is a possibility of both a no growth, low e equilibrium AND a high growth, high e equilibrium elements of both neoclassical and endogenous growth theories4-17Growth Traps and Two-Sector ModelsSuppose there are two types of investment opportunities:Those with diminishing MPK at

26、low e levelsThose with with constant MPK at high e levelsFigure 4-2 illustrates such a situationThe production function has a curved segment at low levels of e and an upward sloping line at high levelsPoint A is a neoclassical steady state equilibrium, while past point B there is ongoing growth (end

27、ogenous growth theory)Insert Figure 4-2 here4-18Growth Traps and Two-Sector ModelsSuppose there are two types of investment opportunities:Those with diminishing MPK at low e levelsThose with with constant MPK at high e levelsWith two outlets for investment, society must choose not only total investm

28、ent, but also the division between the twoSocieties that direct I towards research and development will have ongoing growthSocieties that direct I toward physical capital may have higher output in the short run at the expense of lower long run growthInsert Figure 4-2 here4-19Solow Model with Endogen

29、ous Population GrowthOne of the oldest ideas in economics is that population growth works against the achievement of high eThe Solow growth model predicts that high population growth, n, means lower steady state e as each worker will have less capital to work withOver a wide range of es, population

30、growth itself depends on e, n(y)Very poor countries have high birth rates and high death rates, resulting in moderately high population growthAs e rises, death rates fall and population growth increasesAt very high es, birth rates fall, some even approaching zero population growth (ZPG)4-20Solow Mod

31、el with Endogenous Population GrowthFigure 4-3 illustrates the modified investment requirement line on the Solow diagram to account for n as a function of y The investment requirement line, n(y) + dk, rises slowly at low levels of e, then sharply at higher levels, and finally levels off at high leve

32、ls of eInsert Figure 4-3 here4-21Solow Model with Endogenous Population GrowthThe investment requirement line crosses the savings curve at points A, B, and CPoint A is a poverty trap with high population growth and low esPoint C has low population growth at high esPoints A and C are stable equilibriums because the economy moves towards these pointsPoint B is an unstable equilibrium since the economy moves away from itInsert Figure 4-3 here again4-22Solow Model with Endogenous Population GrowthHow can an economy escape from the low-level equilibr