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Unformatted text preview: HAKAN YILMAZKUDAY EC 601 ECONOMIC GROWTH LECTURE NOTES WEEK 3 LEARNING BY DOING It is accepted that the growth rate of per capita income cannot be explained by only changes in labor-capital ratios since this does not capture the fact that knowledge increases by producing more output. Thus the Solow model is incapable of explaining the productivity increasing by the accumulation of knowledge. This fact comes into picture when we analyze the convergence between countries that have the same level of capital accumulation. Arrow (1962) refers to this fact by stating that different countries have different production functions even apart from differences in natural resource endowment. He introduces an endogenous theory of the changes in knowledge in order to explain these differences. In his model, the acquisition of knowledge is termed “learning” or in more recent terms “learning by doing”. Learning is a product of experience that takes place during activity since it usually occurs through the attempt to solve a problem. Verdoorn (1956) relates current output to cumulative output in order to explain learning by doing. This is an important contribution because it points out an indicator of the acquisition of knowledge. Arrow (1962) refers to the study of Lundberg that supports this idea by analyzing the Horndal iron works in Sweden. Although no new investment is made the production of the firm increases on the average 2% per annum. This can be explained by only the increase in the cumulative output, thus, learning by doing. 2 Although there such examples of learning by doing given above, the formal analysis of it has been made by Arrow (1962), the focus of this paper. In his model, the possibility of capital-labor substitution is ignored; the theorems about the economic world have probably differed from those in most standard economic theories; profits are the result of technical change; net investment and the stock of capital become subordinate concepts, with gross investment taking a leading role. Opposed to Verdoorn (1956), Arrow takes cumulative gross investment as an index of experience, because he claims that only gross investment can capture the productivity of capital. Each new machine produced and put into use is capable of changing the environment in which production takes place, so learning is taking place with continually new incentives. The learning enters in the production function as in the model of Solow in which technical change is completely embodied in new capital goods....
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- Fall '11
- Economics, arrow, Römer, Barro, Sheshinski