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ECON 313 lecture #2

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

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Lecture 2: Growth models Readings: Todaro, Chapter 3
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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?
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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
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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
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Some basic indicators
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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 ...
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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
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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
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Back to the basic indicators
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Income per capita in selected countries
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GDP per capita
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Shares of global income 2005
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Other problems with GDP?
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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
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Is GDP a good measure of development? Others say no: Sen’s “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)
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Back to the basic indicators
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Human development index Index based on: longevity (life expectancy) education (literacy, enrollment) Log of real per capita PPP GDP: decreasing returns
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HDI (2004): growth without  development 
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More philosophical question: what is the  goal in life? Happiness? Less stress? Traditional economists say: why don’t we start with GDP...
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GDP and HDI
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