Intermediate Macroeconomic Theory: Lecture 5 - Economic Growth by Costas Azariadis, Slides of Macroeconomics

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Intermediate Macroeconomic

Theory

Costas Azariadis

Intermediate Macroeconomic Theory

Costas Azariadis

Lecture 5: Economic Growth

Intermediate Macroeconomic

Theory

Costas Azariadis

1. THE ISSUES

a. Facts of growth: successes, failures

b. Sources of growth: where does success come from?

c. The dynamics of growth. Does every country get rich in the

long run?

d. The Solow growth model

Intermediate Macroeconomic

Theory

Costas Azariadis

Walmart Example

Kt = million square feet of floor space

Nt = thousand employees

Q: Where to place retail stores & dist’n centers?

How many employees to put in each location?

A: Walmart is not perfect.

Does not equate MPN, MPK across stores.

If it did, Walmart ‘s TFP would go up! Profits, too!

Intermediate Macroeconomic

Theory

Costas Azariadis

c) Sources of growth & growth accounting

The production function says:

growth in Y = growth in A + capital share times growth in K +

labor share times growth in N

”growth” in K: more capital; better capital

”growth” in N: more workers; higher level of skills

Example:

1. PC or phones in 1988 vs. now

2. educational achievement in 1908 vs. now

Intermediate Macroeconomic

Theory

Costas Azariadis

• TFP doubles from 1940 to 2008

• Labor productivity doubles from 1975 to 2005

• TFP growth equals 1/3 of income growth, ½ of per capita growth

Intermediate Macroeconomic

Theory

Costas Azariadis

d) Why did TFP fall in the 1970’s? Rise in the 1990’s?

• oil shock vs
• IT revolution

Industrial revolutions involve initial falls in TFP because

-much capital becomes obsolete

-people slow to learn new technologies

Industrial revolutions also involve initial stock market declines (obsolete firms)

Eventually TFP & stock market both recover.

Economic Growth

Intermediate Macroeconomic

Theory

Costas Azariadis

Next 50 year growth=80%

170% (^) 75%

Economic Growth

Intermediate Macroeconomic

Theory

Costas Azariadis

Next 50 year growth=300%

Intermediate Macroeconomic

Theory

Costas Azariadis

Intermediate Macroeconomic

Theory

Costas Azariadis 3.GROWTH DYNAMICS:^ THE SOLOW MODEL

a) Issues

-Growth miracles:

• Europe: U.K., Finland, Ireland, Spain
• Asia: Japan, Korea; Taiwan, H-K, Singapore; China, India
• Africa: Kenya (1970’s), Lesotho, Namibia
• L.America: Chile, Brazil(slowly)

”Miracle” means convergence to U.S. living standards

Intermediate Macroeconomic

Theory

Costas Azariadis What is the recipe for a ”miracle”? For a ”disaster”?

b)The Solow Model (1956)

-Associates growth with

”Capital deepening”= piling up more & more capital per worker

-Ignores growth from:

1. improvement in quality of capital & labor

2. investment in R&D

3. improvement in markets & institutions

4. expansion in international trade

Intermediate Macroeconomic

Theory

Costas Azariadis

-Following in the footsteps of classical economics from 19th

century {Ricardo, Marx}

-Key contributions from

Robert Solow (1956)

Trevor Swan (1956)

-Basic Idea

Closed economy without gov’t or taxes

Yt = Ct + St + Tt = Ct + It + Gt

ignore Tt , Gt

 In equilibrium Saving= Investment: St = It

Intermediate Macroeconomic

Theory

Costas Azariadis

-Saving is proportional to GDP

a) The data

s= saving rate ≈ .18 for rich nations

≈ .25-.30 for middle income nations

≈ .02-.05 for really poor nations

≈ .45 for China

A= TFP

= capital share ≈.

-Equate saving with investment

-Divide eq.(1) by Nt on both sides. Express everything in terms of the

capital/labor ratio:

   

1 St sYt sAKt N t

1 (^1 ) (^1 )

1 sAKt Nt Kt  K t

   (^)   



t

t t N

K k 

Intermediate Macroeconomic

Theory

Costas Azariadis

 b 

n

k sAk

H k

k H k a

n k k sAk

N

K

N

K

n

N

K

sA

N

K

N

N

N

K

N

sAK N

t t t

t t

t t t

t

t

t

t

t

t

t

t

t

t

t

t

t

t t

1

1

1

1

1

1

1

1























 

 The Solow model in eq. (2) describes how k evolves over time: kt+

depends on kt, kt depends on kt-1, etc.