# O they believe that underdevelopment is an externally

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o They believe that underdevelopment is an externally induced phenomenon. - On the other hand, most neoclassical revisionists are from Western countries. o They believe that underdevelopment is an internally induced phenomenon that is caused by developing country governments’ overly active intervention and bad economic policies. - free markets’ allocation of prices is usually better than government intervention - Developing countries don’t have workings of free markets as we see in Western countries. They lack infrastructure and competition in their markets. The Solow Neoclassical Growth Model - shows that economies with the same rates of savings, depreciation, labour force growth, and productivity growth will convergence to the same level of income - The aggregate production function, Y = F(K, L) is characterized by constant returns to scale. - At any time, t, we have Y as gross domestic product, K is the stock of capital (which may include human capital as well as physical capital), L is labour, and A(t) represents the productivity of labour. - Constant returns to scale mean that if all inputs are increased by the same amount, say “a”, just like a positive constant such as 10%, then output will increase by the same amount (10% in this case). - More generally, aY=F(aK, aL). Because “a” can be any positive real number, a mathematical trick useful in analyzing the implications of the model is to set a = 1/L so that Y/L= f(K/L, 1) or y=f(k). - Lowercase variables are expressed in per-worker terms in these equations. f(k) has a concave shape; that is, increasing at a decreasing rate. It reflects diminishing returns to capital per worker.
- - It shows that output per worker is a function that depends on the amount of capital per worker. The more capital with which each worker has to work, the more output that worker can produce - We assume that the labour force grows at rate n per year and A’s growth rate is λ. The Solow equation (Equation A3.2.4) gives the growth of the capital-labour ratio, k (known as capital deepening), and shows that the growth of k depends on savings sf(k), after allowing for the amount of capital required to service depreciation, δk. That is - - We assume that A is constant. Due to A being constant, there will be a state in which output and capital per worker are no longer changing, known as the steady state. - set ∆k = 0: - - The capital per worker k* represents the steady state. If k< k*, we see from figure A3.2.1 that (n + δ)k < sf(k). - Solow equation (Equation A3.2.4) tells us that when (n + δ)k < sf(k), ∆k > 0. This relationship shows us that k is growing toward the equilibrium point k* - Similar logic shows that when k> k*, (n + δ)k > sf(k), and as a result, ∆k < 0, which means k is shrinking towards k*. - The country with the higher savings rate converges to a higher equilibrium income per worker. There are controversial signs related to the link between the rate of savings and the rate of growth.