History of Economic Growth Theory: a
1. Smith, Ricardo, Malthus and Mill had little hope
for sustained growth.
2. Forgotten for a long while. Ill attempted in UK
(Harrod and Domar).
3. Robert Solow (MIT, Nobel 1987): two main
papers: 1956 and 1957
Steady State Analysis
Steady State: k = 0
Solve for steady state 0 = s (k)(n + )kk
s n + 1 1
Steady state output per worker y= s n+ 1
Steady state output per worker depends positively
on the saving (investment) rate and negatively on the
How do incomes and growth rates vary across
Summers-Heston data set at Penn: follow 104
countries over 30 years.
Focus on income (GDP) per worker.
Measure income (GDP) using PPP-based exchange
Development Facts I
1. Enormous var
Output is produced by inputs capital K and labor L,
in combination with the available technology A
Want: decompose the growth rate of output into the
growth rate of capital input, the growth rate of labor
input and te
Macroeconomics and the Supply Side
Net wealth position of the US: difference between
what the US is owed and what it owes to foreign
Capital account balance: equals to the change of the
net wealth position
of the US
Capital Account Balance thi
The Neoclassical Growth Model and Growth
We can take the absence of growth as a positive
Illuminates why capital accumulation has an inherit
limitation as a
source of economic growth:
1. Soviet Union.
2. Development theory of the 50s and 60s.
Neoclassical Growth Model
Models and Assumptions I
What is a model? A mathematical description of the
Why do we need a model? The world is too
complex to describe it in
every detail. A model abstracts from details to
understand clearly the
Introduction to Growth Theory
I do not see how one can look at figures like these
without seeing them as representing possibilities. Is
there some action a government could take that
would lead the Indian economy to grow like
Indonesias or E
Basic Assumptions of the Neoclassical
1. Continuous time.
2. Single good in the economy produced with a
3. No government or international trade.
4. All factors of production are fully employed.
5. Labor force grows at con