ECON 313 lecture #2

ECON 313 lecture #2 - Lecture 2: Growth models Readings:...

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Unformatted text preview: Lecture 2: Growth models Readings: Todaro, Chapter 3 What is development economics? Two questions: Why are some countries rich, and others poor? What policies, programs, reforms can be put in place to reduce poverty? What will we do in this lecture? Define measures of development Descriptive statistics What is the gap between rich and poor countries? Within countries? Traditional growth models: Harrod-Domar Solow Endogenous growth Empirical test Criticism Measure of economic development Gross Domestic Product (GDP): Market value of all goods and services produced within a country in a given period of time GDP per capita Some basic indicators MANY Problems with GDP: 1) PPP How to compare GDP across countries? Use official exchange rates: valid for internationally exchanged goods But domestic goods may be (much) cheaper in LDC: lower cost of life Example: A banana is worth much less in India than in the USA GDP for LDC would be biased ... MANY Problems with GDP: 1) PPP Account for cost of life: Collect data on domestic prices of 150 categories of goods and services in each countries Construct international prices GDP=quantity*these international prices MANY Problems with GDP: 1) PPP Example: USA produces 1 TV + 1 banana India produces 1 TV + 1 banana TV exchanged internationally, same price (law of one price) Price banana in India < in USA Does GDP India < GDP USA? Use international prices Problems: banana is a simple good Back to the basic indicators Income per capita in selected countries GDP per capita Shares of global income 2005 Other problems with GDP? Is GDP a good measure of development? Some say yes: Relevant for poor people: can buy you the basic needs: food, shelter, security At least gives you the possibility to buy these goods, or not, if prefer to follow a more spiritual life = a kind of freedom Is GDP a good measure of development? Others say no: Sens Capabilities Approach (Development as freedom) Functionings: what a person can do with the commodities (e.g. book, bicycle) Capabilities: ways to convert commodities into funtionings (e.g. education, health) Back to the basic indicators Human development index Index based on: longevity (life expectancy) education (literacy, enrollment) Log of real per capita PPP GDP: decreasing returns HDI (2004): growth without development More philosophical question: what is the goal in life? Happiness? Less stress? Traditional economists say: why dont we start with GDP... GDP and HDI GDP and infant mortality GDP and poverty GDP and happiness Basic growth model Firms Consumers ?...
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This note was uploaded on 03/10/2012 for the course ECON 313 taught by Professor Iforget during the Winter '10 term at McGill.

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ECON 313 lecture #2 - Lecture 2: Growth models Readings:...

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