Econ 313 Lecture 3

Econ 313 Lecture 3 - Lecture 3: Contemporary Theories...

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Lecture 3: Contemporary  Theories Readings: Todaro, Chapter 4
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Summary of Solow model Convergence because high returns to capital at low levels of capital
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Summary of Solow model Growth comes naturally from perfect competitive markets If needed human capital available If technology transfer If government provide essential services No need for development policy
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But no evidence of convergence Regressions: yes, but shaky Historical growth 1960-1990: World: 1.7% (double after ??? years) East Asia: 3.3% South Asia: 1.9% Sub-Saharan Africa: 0.2%
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But no evidence of convergence Difference between OECD and rest of the world:
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Growth Convergence and Absolute  Income Divergence 
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One problem with Solow Individuals and firms operate in isolation My actions do not affect, or are not affected, by the actions of others An individual fully captures the fruits of effort, investment, or the costs of actions=full internalization
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What if? There are externalities / complementarities / spillovers Actions of one agent increase the incentives for other agents to take similar actions But difficult to coordinate Then coordination failures can lead to a sub- optimal equilibrium
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Coordination failure - Examples A firm will not locate in an area if workers do not possess the skills the firm needs Workers will not acquire the skills if there are no firms to employ them
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Econ 313 Lecture 3 - Lecture 3: Contemporary Theories...

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