Take home exam I - Balloga 1 Abram Balloga Econ 4730 Take...

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Balloga, 1 Abram Balloga Econ 4730 Take Home Midterm 11/6/2008 Part A I. (1) (a) In his use of ‘Solow residuals’ Young makes a distinction between the concepts of perspiration and inspiration. He argues that the development of NIE’s is the result of perspiration rather than inspiration. Perspiration is from the expensive and tedious factor accumulation as opposed to inspiration which considers TFP. His analysis shows that the NIE’s growth stems from common factors of countries in their early industrialization phase – accumulation of human capital by education, experience, and the completion of infrastructure (Wan 159). Low TFP can lead to low future productivity and economic growth, however this conclusion is not always accurate. (b) In his use of ‘Solow residuals’ Young looks at whether outward looking economies or inward looking economies aquire greater economic benefit and thus higher growth rates. In his research he acknowledge the existence and benefits of spillover in an open economy but concludes that outward looking closed economies still maintain higher growth rates. Open economies face greater competition in world labor markets and NIE’s demonstrate a reliance on advanced technology production. In the long run wages increase to a level forcing them to specialize and lose much of their spillover gains, and stagnating their economy with fewer market opportunities. Diminishing returns happen too quickly in an open economy because there is only so much you so long you can rely on the advancements of other countries. (2) (a) We can use the Benchmark model to disagree with Solow residuals evaluation of development. The Solow model attempts to isolate output growth rates which we cannot explain using all of the inputs. The major problem with this is that the model cannot handle ‘flow-input’ and ‘flow-output’s where there exists a significant time gap between short term cost and the benefits in the long run. Therefore Solow cannot be applied to emerging economies to describe their rapid growth, including the NIE’s.
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