04 - CHAPTER 4 GROWTH AND POLICY Chapter Outline:...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 4 GROWTH AND POLICY Chapter Outline : Endogenous growth theory Constant and increasing returns to scale Private and social returns to capital Absolute convergence Conditional convergence The poverty trap The golden rule capital stock Growth in Asia Reforms in Eastern Europe Limits to growth Changes from the Previous Edition : Chapter 4 has only been slightly updated with no major changes in the material presented. Introduction to the Material : There is no easy explanation for the fact that different countries experience wide variations in their economic growth rates. Chapter 4 sets out to explain what policy options countries have to affect their growth in income per capita. Industrial countries may fare best if they devote resources to research and development that will lead to technological improvements. Developing countries, on the other hand, may achieve better results by investing in human capital and getting new technology either through direct foreign investment or by borrowing funds to pay for new physical capital. Poor countries with a high population growth may also want to consider population control policies. While the neoclassical theory developed in Chapter 3 makes it clear that technological progress is essential for long-term growth, it does not clarify which factors affect such progress. Therefore the neoclassical growth model needs to be expanded to take endogenous (self-sustained) growth and the policy options that enhance it into consideration. The neoclassical growth model treats the growth rate as exogenous, while the endogenous growth model uses a framework that attempts to explain how government policies and economic behavior can affect technological advances. In order to do this, the model assumes that the rate of technological progress is determined by the proportion of an economy's resources that is devoted to research and development and that the steady-state growth rate is affected by the rate at which the factors of production are accumulated. The major conclusion of endogenous growth theory is that countries with different savings and investment rates should have persistent differences in their economic growth rates. Surprisingly, however, most empirical evidence appears to support the notion that differences in the savings and investment rates affect the growth rate of output per capita only for a transitional period. A higher level of investment leads to a higher level of per capita income but not a higher per capita income growth. This is referred to as conditional convergence. 44
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Neoclassical growth theory assumes a production function with a diminishing marginal product of capital. The savings function sy = sf(k) is curved, which ensures an intersection with the (n + d)k-line (the investment requirement line) at a stable steady-state equilibrium. Convergence to a steady-state solution will always take place, since the capital stock per head (k) increases (decreases) as soon as
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/23/2008 for the course ECON DEPAR Economics taught by Professor Dr.dwightisraelsen during the Fall '08 term at Utah State University.

Page1 / 11

04 - CHAPTER 4 GROWTH AND POLICY Chapter Outline:...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online