POSC 182 Lecture 11 2010

POSC 182 Lecture 11 2010 - POSC 182: Politics and Economic...

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POSC 182: Politics and Economic Policy Unit 1: Institutions Lecture 11: Review January 29, 2010
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Midterm Details In Class 50 minutes Multiple Choice and Short Answer Focus on concepts, not facts Bring: Scantron (882-E) and Blue Book Covers lectures and readings
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The Main Questions of this Unit What are the underlying sources of economic growth? How do we explain the distribution of resources in an economy? How do we evaluate whether we should believe a theoretical argument?
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Political Economic Framework Economic Performance (t) De Jure Political Power (t) Distribution of Resources (t+1) Political Institutions (t) Distribution of Resources (t) De Facto Political Power (t) Political Institutions (t+1) Economic Institutions (t) Ability to Overcome Collective Action Problem (t)
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The First Fundamental Theorem of Welfare Economics Competitive markets tend toward efficient allocation of resources But: Competitive markets do not guarantee that the distribution of resources is the most socially desirable or equitable. That is, an economy may be efficient and growing, but the population may not be improving their welfare significantly.
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Second Fundamental Theorem of Welfare Economics If a government redistributes resources in a lump sum, competitive market forces will ensure that the outcome is efficient In other words: It is possible to redistribute resources, say from the wealthy to the poor, and still achieve efficiency if it is done through a lump-sum.
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Efficiency vs. Equality From the second theorem, economies become less efficient when: Markets are not competitive Redistributions are not lump sum incentives can become perverse Non-lump sum redistributions can distort incentives (reward less productive activities) The balance between efficiency and equality is determined by politics
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Chinese Income Distribution Mean Income in 1970 Mean Income in 2000 Width ~ Degree of Inequality • Mean Income has Increased • Poverty (<$1/day) has Decreased • Inequality has Increased Source: Sala-i-Martin (2006)
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Political Economic Framework Economic Performance (t) De Jure Political Power (t) Distribution of Resources (t+1) Political Institutions (t) Distribution of Resources (t) De Facto Political Power (t) Political Institutions (t+1) Economic Institutions (t) Ability to Overcome Collective Action Problem (t)
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Income Per Capita Adjusted for Inflation Incomes are generally increasing But, there is divergence Source: Angus Maddison (1995)
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The Puzzle of Divergence Solow Model Convergence: Poor countries should grow faster than rich countries because of diminishing marginal return to capital Output / Income Capital ∆C ∆C A B A > B
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Innovation as a Source of Growth
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Different Types of Growth Growth from Factor Accumulation Accumulation of capital and skills per capita through savings (like Solow) Endogenous Growth Innovation leads to technologies that increase productivity One person is more productive due to better technologies Example: The internet has made people more productive
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This note was uploaded on 10/05/2010 for the course POSC 182 taught by Professor Schuelenberg during the Spring '08 term at UC Riverside.

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POSC 182 Lecture 11 2010 - POSC 182: Politics and Economic...

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