total - Abram Balloga Econ 4730 Take Home Midterm 11/6/2008...

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Abram Balloga Econ 4730 Take Home Midterm 11/6/2008 Part A (1) (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. The model assumes that East Asian growth is not sustainable, which is consistent with the ‘catching up concept of growth supported by the benchmark model. However Solow is geared toward the case of USSR which was a different case than the NIE’s in its isolation. Also the benefits of an export led economy are ignored as well as the concept of technology diffusion/spillover. The Benchmark model on the other hand is able to explain why NIE’s current growth rates are unsustainable. It assumes that growth depends heavily on the diffusion of technology, the extent to which it can be procured and the amount of technological discrepancy that can be exploited – both of which will exhibit diminishing returns as NIE’s approach US growth rates. As such, this shows how the per-capita income gap cannot be bridged. From handout 10/1
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(b) The Solow model does not compensate for or explain unpredictable shocks to which high growth economies are vulnerable. In their development, the NIE’s procured large foreign debts and withheld too little in national reserves. Foreign short term debts can be withdrawn overnight, in the event of which, the NIE’s would experience severe liquidity problems and a financial crisis. Governments were more concerned with maintaining the growth rates that kept them in power, than building a sustainable economy- showing favoritism toward business interests (Wan, 177). Because of the tendency of those in power to pursue a political economy, the Solow model cannot be relied upon since the economy might eagerly be led into an unstable and vulnerable state, even if the basics of the economy are sound. Outward looking states like NIE’s are extremely sensitive to shocks to foreign economies since they rely so heavily on exports. From handout 10/8 (i) The crisis of 1997 was the result of an unstable financial structure related to over investment in the maturing East Asian economies (Wan 167). As the previously inefficient economies begin to reach efficient use of labor inputs, and specialize, equilibriums are reached that are highly dependant on foreign
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This note was uploaded on 06/25/2009 for the course ECON 4730 taught by Professor Henrywan during the Fall '08 term at Cornell University (Engineering School).

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