Economic Development

Production function

Y=F(K,L)

Differences in growth

Y=F(K,L) proximate sources of growth Productivity's role Through taking the logs and derivations you can get from the Cobb douglas production function Y=AK^α L^1-α to the Growth of Y gY=a+αgK + (1-α)gL

2 percent growth

at 2 percent growth of GDP a year, average income doubles in 35 years, at 4 percent it doubles in 18 years

Import substitution

for two decades in the mid 20th century, import substitution, the replacement of imports with home produced goods, was seen as the shortest path to development

Saving is a fixed share of total income Y

S=sY and S=I

Comparative Perspective Poverty Reduction in China, India, Brazil

China and India have seen rapid growth (and poverty decreased) but rising inequality and Brazil hasn't seen too much growth but growing equality (poverty also decreased) yet Brazil still has highest level of inequality so there is no empirical evidence that growth leads to greater or less inequality

Easterly Chapter 2

Dora believed that production equals machinery, that GDP growth will be proportional to the share of GDP toward investment, writing in the aftermath of the great depression he took high unemployment as granted, correlates with sir arthur lewis surplus labor model that only included machinery as a constraint finance gap is the void between the required savings and the actual savings of poor countries to finance investment Rostow had takeoff theory growth doubling from 5-10 percent and believed in filling the financing gap (soviet thought) and got JFK to start foreign aid Between 1950 and 1995 Westerners gave 1 trillion in 1985 dollars to foreign aid Recipient countries had to increase saving for sustained growth and to pay back creditors (but this didn't happen for most countries, they used the aid for immediate consumption ) communist countries created the concept of finance gaps, the cold war inspired filling the gap with aid and now the capitalist countries strove to fill the gap Investment is not necessary nor sufficient for growth in the short or medium run need incentives for growth or aid will lead to consumption rather than investment

Europe

In the seven years since the Crisis began (2007-2014), GDP per capita growth in the Eurozone has been much weaker than in the US (averaging -0.4% per year vs. +0.3%). due to poor performance in labor utilization

Conditional Cash Transfers

Income transfers take the form of ash grants or food pricing/ redistribution programs CCTs are programs that provide cash payments to eligible households and in return families must satisfy program educational and health goals

Three Vignettes- Ethiopia

Per capita in comes in 2004 were about the same levels as in 1981, ethiopia was characterized by economic stagnation, since 2004 economic growth averages 6.6% as a result of better economic policies and management showing way for FDIs Infant mortality rates have fallen in the past 4 decades showing that health can improve even if income doesn't

Rate of growth of GDP per capita

Rate of growth of GDP per capita = Rate of growth of GDP - Rate of growth of population

Global income inequality

Recently there has been a widening discrepancy between the richest and poorest countries

How to take the geometric mean

Suppose you wanted to calculate the geometric mean of the numbers 2 and 32. This simple example can be done in your head. First, take the product; 2 times 32 is 64. Because there are only two numbers, the nth root is the square root, and the square root of 64 is 8 so for HDI: HDI = (Health x Education x Income) 1/3

Poverty vs Inequality

The bottom 20 percent of a country can have a large distributional share of income but the country as a whole can be impoverished Better to measure poverty in distribution of consumption rather than income because income varies so much Once a poverty line is chosen by a country, the country tries to maintain that line with the changing amount of consumption and goods so the ability to purchase the core consumption basket of food and necessities is held constant

Rule of 70

The number of years it takes to double anything = 70/ growth rate

Immiserizing Growth

The poor witness a decline in their average income despite growth in the economy, in one in five cases of economic growth the income levels of the poor decrease

PG squared

The poverty gap places equal weight on an individual just below the poverty line and an individual far below the line , this is accounted for if you square PG

Poverty Gap

The severity of poverty, measured by the amount of people that fall below the poverty line and how far they are from that line PG=[(PL-MC)/PL] x H Pl is poverty line and MC is mean consumption per capital and h is the head count index The bracketed term represents how far the average poor person is from the poverty line and the head count index weights this amount by the percent of poor people in the population

TEST

To Do: Meet with James Read mckenzie and kraay Study 3 types quantitative questions- memorize formulas Explain how various models works-know the Solow and Harrod, changes in variables relationship between development and democracy, what do institutions do, know authors and arguments

Conditional convergence

allows each country to have its own individual combination of these key parameters once we allow we can see that poorer countries grow faster as they approach their own steady state

MPK

diminishing marginal product of capital (MPK), poor countries are further left on the x axis of a slow diminishing returns production function so the same amount of investment will result in faster growth in poor countries

Social Safety Nets

household poverty is transitory so social safety nets are policies that help individuals and households when income and consumption shortfalls occur e.g. Employment Guarantee Scheme in India and Trabajar Argentina ensures public employmeent opporutnitie within a few weeks of the individuals request

Productivity growth

increasing amount of output produced by each machine or worker can improve the efficiency with which current factors are being used tech change

Growth of output with respect to Harrod Domar Harrod Domar Relationship

production function in terms of changes in output and changes in capital is ΔY=ΔK/v and growth of output g is equal to g= ΔY/Y= ΔK/Yv and if you substitute the right side of the change in capital equation (sY-dK) into the growth of Y equation (ΔK/Yv) and simplify you get g=(s/v)-d so save and invest more and your economy will grow but you have to estimate the incremetnal capital output ratio v and the depreciation rate

World Bank 1990 Strategy to Reduce Poverty

promote market oriented economic growth and direct basic health and education services to the poor, also develop social safety nets to assist individuals unable to take advantage of market opportunities including the sick and old and those affected by shocks UN development program raises the point that economic growth may just put more money in the hands of the rich but inequality doesn't systematically grow with economic growth so growth should be good for the poor

Economic Growth

rise in national or per capita income, explains how worlds's population living in low income countries as decreased so rapidly in the past few decades without structural change economic growth is an indicator of new income concentrated in the hands of a few can lead to development because growing the amount resources can allow for distribution to developmental goals

Inequality and growth

saving rates increase with income capital: accumulation of human capital, high inequality lower human capital high inequality leads to political instability

Attributing growth

the bulk of the growth process can be attributed to the residual with relatively small amounts apportioned to various categories of labor capital and other inputs, increases in capital stock often account for less than half the increase in output TFP usually counts for more growth than capital in developed countries and vice versa

Kuznet's Modern Economic Growth

using science to problem solve economic production which has led to industrialization, urbanization and explosive growth of population

Refuting Lewis and Kuznets

when inequality is high worthwhile e investments may not be undertaken by the poor because they cannot afford them and do not have lines of credit , the rich influence politics including government spending and trade policy some data finds that high inequality is associated with slower subsequent growth and some data finds little relationship between the two Inconclusive due to the complexity

Lewis's Surplus labor model

with a surplus of labor wages held down by the elasticity of supply of workers, industrial growth is accompanied by a rising share of profits and the people at the top make more and inequality widens, the turning point is reached when all the surplus labor has been absorbed and the supply of labor becomes more inelastic so wage and labor's share of income rises ineaulity is a source of growth because the profit earners at the top save and invest to expand enterprises Kuznets also proposes a similar idea as there is transition from agriculture to industry ( a U shape curve of inequality) Yet evidence suggests that in absence of this U shaped curve inequality is determined by a complexity of things other than just primarily economic growth

Change in capital Stock Change in labor force

ΔK=I-(dK) Investment - depreciation of existing capital ΔL=nL population growth x existing labor force so ΔK=sY-dK

Absolute poverty

$1.25 per day or less PPP adjusted , latest PPP estimates indicated that the cost of living in developing countries is actually higher than previously thought so consumption expenditures purchased less so poverty levels really were higher In 1981, 52% of the developing world fell below the $1.25 a day poverty line and in 2005 this head count ratio stood at 25

How Development leads to Democracy

Beginning of 21st century there were 90 states that were democratic Modernization leads to both Economic growth and development and inspires greater participation in the politics Modernization began during the industrial revolution and it was thought that 3rd world countries would follow By the height of the Cold War Modernization ideology transitioned into portraying "underdevelopment as a direct consequence of a country's psychological and cultural traits" and that modernization would instill modern values and progress to "backward" countries Dependency theorists thought of this as patronizing and ethnocentric and they believed that modernists just wanted to exploit the poor countries and lock them into a state of dependence 1980s dependency theory was in vogue Recently the countries most "modernized" and involved in global markets are growing the most giving modernization more credibility Modernization is reversible through economic crises Cultural heritage of a nation also influences the modernization that takes place and it is highly resilient Modernization is not westernization High income countries are not necessarily democratic however economic security does inspire self expression and political involvement The changes of increased GDP gives way to roughly predictable changes in value systems: As modernization takes place countries transition from traditional to secular ideology and from survival values to self expression with economic security development is conducive to democracy to the extent that it, first, creates a large, educated, and articulate middle class of people who are accustomed to thinking for themselves and, second, transforms people's values and motivations. You do not need democracy to install self expression but rather self expression can give way to democracy In recent decades, self-expression values have been spreading and getting stronger, making people more likely to directly intervene in politics Democratic peace theory holds true because of shared values between democracies Development lead to democracy- gives way to literacy a middle class property rights modernization and a change of ideology from survival to self expression

Easterly Chapter 3

Capital Fundamentalism- the belief that buildings and machinery is the fundamental determinant of growth capital only contributes to 1/3 of production if factor share income for capital is α= 1/3 then factor income share income for labor is 2/3 (1-α) so you cannot have long run growth from capital because capital only accounts for 1/3 of factor share income and there are diminishing returns to scale but when we talk about growth we are talking about the standard of living of each person growing and this can only happen if the output per person of goods and services on average increases (labor productivity), and labor productivity only has two inputs machines and labor but machines have diminishing returns to scale and thus cannot sustain growth Luddite Fallacy- Tech breakthroughs put people out of work A fallacy because labor saving technology is output per person increasing technology because with more output and the same number of workers there is more income for each worker When GDP rises faster than employment is growth of income per which is the only way workers "very low incomes" can increase, the UN stated this was jobless growth and leads to very low incomes According to the Solow model poor countries should have grown super fast because super high returns to investments but this was not happening Paul Romer compiled evidence during the "good" years of growth for poor countries, 1960 -1981, and found that money was not flowing into poor countries And after 1981 poor countries did even worse than rich countries, subsaharan africa and latin America had two lost decades of growth and the Middle East and North Africa tanked shortly after There is a misconception of convergence of income levels and that the poor will get rich but this is only based on historical evidence derived from available statistics which are only available in rich countries

Factors of Production Total output

Capital and Labor total output is determined by how much capital a country has and how productively it uses those assets

Democracy Does Cause Growth

Channels between Democracy and Growth - Rule of law, education, stability, health, Public goods Democracy can make things worse for economic growth- gridlock argument (allowing everyone to have a say can actually hurt your chances of reform), interest group (competing interest groups lead to gridlock), redistributions (rich having to give back) country that switches from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the long run (over 30 years) Four challenges to estimating true impact of democratization on growth 1. democratic indices are often erroneous ( Use reliable index) 2. Because democratic and non democratic countries differ in so many ways its hard to say how democritizaion truly affects growth (Introduce fixed effects) 3. You have to model GDP dynamics (control for lags in linear regression) 4. Democritizaiton may be correlated with other economic conditions that are truly the cause of economic growth (Implement instrumental variables as well as fixed effects) There is a dip in GDP before the democratization and growth begins so you must include these lags or you will overstate the growth democracy contributes to future GDP by increasing investment, increasing schooling, encouraging economic reforms, improving public services and reducing social unrest. Papaioannou and Siourounis (2008) construct a new measure of permanent democratizations, and estimate a positive effect of democratization on growth

Why Nations Fail

Countries differ in economic success because of different institutions, different rules of law regarding how the economy works and the incentives that motivate people Inclusive economic policies foster economic activity productivity growth and economic prosperity through incentives --> rules of law because you get to keep the fruits of your invention, incentives to accumulate human and physical capital Need to enforce protection of property rights for the broad population also need public services like roads and an available market for goods Engines of Prospertiy- inclusive markets pave way for technology and education which lead to sustained economic growth Politics is the process by which a society chooses the rules that will govern it, political power rests in a plurality of groups that are represented centrally in the state Creative Destruction- economic growth and tech growth replace old with new, creates losers and winners Powerful groups often oppose economic growth because it is destabilizing and creates political losers Economic extractivity can create growth through some inclusivity but monopolized or by corrupt direct allocation of resources to themselves. Neither of which growth is sustainable You can have extractive political institutions that demonstrate inclusive economic inclusivity like South Korea

Finding Index values for HDI

Dimension index = (actual value - minimum value)/ (maximum value - minimum value) The four indices you must calculate are Life expectancy at birth (years) (maximum 85 minimum 20) Mean years of schooling (max 15 min 0) Expected years of schooling (max 18 min 0) Gross national income per capita (PPP (year) $) (maximum at 75000 and the minimum of 100) First find all of the indices Then you must take the arithmetic mean of the mean years of schooling and the expected years of schooling in order to find the education index And you must take the (ln( actual value) - ln(minimum value) / ln(maximum value)-ln(minimum value )) for GNI per capita (PPP (year) $) And then you aggregate the life expectancy index, the education index and the GNI index by taking the geometric average

Why Africa Grows Slowly- Domestic- Policy

Domestic - Policy Mostly autocratic governments Huge poorly funded public sectors dominate the economies- managers were not under pressure to deliver good services (lack of incentive) and because of the lack of democracy they were not accountable to the public so despite large expenditure on public sector, there was poor public services, this crippled education weak business environment with poor regulation/ enforcement of contracts Not liberalized economies so prices controls sometimes produced incentives to not produce more ---> Urban Bias-services are in the city so its harder to develop things outside the city (expenditures and services are concentrated in cities), anti competitive policies where there are price controls by monopoly buyer of agriculture at low prices and use that to subsidize urban expenditures

Why Africa Grows Slowly - Domestic vs External

Domestic vs External transactions costs tend to be much larger relative to value-added. Africa's intrinsic comparative advantage in natural resource exports may thus have been reinforced by public policies which have made manufacturing uncompetitive rel ative to resource extraction. African policies may have given the region a comparative disadvantage in transactions-intensive activities.

Inclusive political systems

Economic growth changes the distribution of sectors of the economy from agricultural to industrial and serviced based which results in urbanization which is very destabilizing with many social cultural implications and inclusive political systems make it easier for this transition

Angus Maddison's economic growth research

Effectively 0 growth between year 0 and 1000 and the next 820 years showed growth of 50 percent total so growth really didn't begin until around 1820 where over the subsequent 190 years the world income grew at 1.3 percent per year instead of .05 percent rich countries grew at 1.6 percent per year whereas poor countries grew at .16 percent so the ratio of the average incomes in the richest region to the ratio in the poorest regions grew from 2:1 in 1820 to 13:1 in 1950 then Asia started to grow fast, eastern Europe fell apart after the fall of the Berlin wall and latin american growth stagnated but then both regions resumed economic growth during the 2000s, In Africa average growth rates accelerated after 1820 an His research shows the divergence in the world economies

Why Africa Grows Slowly- External- Destiny

External- Destiny Many countries in Africa are land locked, barriers to trade exports are commodities with volatile prices (supply is relatively inelastic so changes in demand lead to large price swings) Aid requires certain political governance that many countries lack

Why Africa Grows Slowly- External- Policy

External-Policy African governments adopted exchange rate and trade policies which were atypically anti-export accumulated large foreign debts Exchange rates were commonly highly overvalued, reflecting the interest of the political elite in cheap imports lots of corruption tariffs debt

The U.S.

GDP growth depends on the growth of hours worked (labor input) and the growth of labor productivity (output per hour). Over the long run, labor input is determined primarily by the growth of the total population and, as we'll see, the per- centage of the population that is employed, population changes slowly so productivity growth is main concern sharp decline in the E/P (Employment to population ratio) ratio instead appears to be the smoking gun behind the apparent slowdown in real GDP growth over the past 20 years or, also contributing is the slowing of labor productivity growth if deceleration in labor productivity and the E/P ratio stabilizes then the US GDP growth will be closer to 2 percent rathe than 3 percent growth

Geography impact on Economic Growth Proponents are Sachs and Diamond

Geography and trade- distance from Ocean transport (cheapest way to transport goods) and navigable rivers, landlocked status , proximity to developed regions, geographic concentration and spillovers (foreign investment, access to new technology and ideas) Geography and Climate - Agricultural productivity, Human effort (much harder to expand productivity when its excruciatingly hot and humid) , disease (countries closest to the equator exhibit lowest levels of GDP per capita, near the equator many diseases such as Malaria Yellow Fever etc are more prominent and reduce productivity, increase rates of NCD later in life, stunting and reduction of IQ)--> vicious cycle of diseases and morality --> low saving low health, high fertility, low schooling --> low GDP per capita Geography and resources- resource curse (boom and bust of commodity prices impact on saving), if resources are the greatest source of revenue then countries will not focus as much on the manufacturing sector which can serve as a source of skill development and technological improvement, Dutch disease- flow of money from oil creates domestic inflation and currency is overvalued ( not highly valued) so it makes imports more expensive, resources can encourage poor political practices and expansion of the government sector, competition to control resources Settler mortality argument, per capita income is highly related to settler mortality in the 18th century , those who survived when settling were able to set up institutions early on

Primacy of Institutions- Rodrik

Geography is the key determinant of climate and of natural resource endowments, and it can also play a fun- damental role in the disease burden, transport costs, and extent of diffusion of technology from more advanced areas that societies experience.' the role of international trade as a driver of productivity change and income growth. We call this the integration view because it gives participation in the larger global economy institutions—in particular, the role of property rights and the rule of law. Geography is the only one of these deep determinants that can be treated as exogenous or not influenced by income. better (market-creating through property rights and ensuring contracts are enforced ) institutions increase income and technological growth which raises incomes and therefore citizens demand more economic development, institutions is the only thing that has a direct affect on income, integration has a positive effect on institutions so integration can have a positive indirect effect on income market regulating—those that deal with market failure like externalities, economies of scale (regulatory agencies) market stabilizing—namely, those that ensure low inflation, minimize macroeconomic volatility, and avert financial crises (central bank) market legitimizing—namely, those that provide social protection and insurance, involve redistribution, and man- age conflict. (pension systems, social insurance) political democracy can be thought of as a metainstitution that helps societies make choices about the institutions they want, explains long term income short term policy does not explain the entirety of long term growth SAPs are fundamentally flawed because development cannot happen as quickly as the given duration of these programs, there are necessary institutional precursors

GDP vs GNP

Gross National Product sum of the value of finished goods and services produced by citizens of a country in a given year and it includes citizens living outside the country GDP counts all output produced within the boarders of a country including output produced by foreign residents but does not include anything produced outside country boarders (more often used because its easier to track a nations income within boarders) problems with GDP are not including unpaid services (families working on family farms in poor countries) difficult to choose the representative prices to include for all the goods and services doesn't account for externalities

Question

How are we innovating in rich countries to produce a relativively consistent 2% growth each year. Why doesn't growth from innovation fluctuate more?

Incremental capital output ratio with respect to Harrod Domar

ICOR to determine the impact on output of additional (or incremental) capital, measures the productivity of additional capital whereas the capital output ratio refers to the relationship between a country's total stock of capital and its total national product In the Harrod Domar model the K/Y ratio is constant thus the average capital output ratio is equal to the incremental capital output ratio so the ICOR = v

Why Africa Grows Slowly- Domestic Destiny

In the 1980s the World Bank and IMF accredited Africa's slow growth to overvalued exchange rates affecting international trade as well as tariffs and other quantitative trade restrictions Domestic - Destiny explanation tropical, leads to disease, and hostile conditions for agriculture and livestock Spread of HIV/AIDS effect on productivity poor soil quality low population density-high costs to transport High levels of resources for export- can appreciate the exchange rate which makes manufacturing less competitive and increases the risk of "loot seeking activities" and civil war Much higher enthno linguistic diversity which is a problem for economic cooperation outside of a democratic environment Because of Colonial history, Africa has population spread across so many regional economies which have limited funding for fixed costs and slow rates of tech growth and small economies are riskier for investors

Global change that affects countries and their economic development

Increased democratization since the early 1990s, its effects are heavily debated Fall in population growth rates in many countries corresponds with increased participation in labor force Spread of endemic disease Facilitation of global trade through falling costs of Transportation and communication Lubricated channels for the movement of capital with more sophisticated financial instruments Spread of information and ideas, information revolution \

Solow model shortcomings

Increasing returns to scale, spillovers and knowledge can increase as well

India Vs China

India's growth is dominated by services whereas chinas growth is more diversified through industry agriculture and services, China's services sector has still shown more growth than India's, No evidence to suggest China's GDP is overstated and that their growth is slowing output per worker in China is way higher consistently than in India

Pros and cons Harrod Domar

It is simple and is reasonably good at predicting short periods of time and it focuses on saving which is essential but saving must be followed by smart investments that pay off and it leaves out important allocation issues limitations stem from rigid assumptions of fixed capital to labor capital to output and labor to output ratios which imply little flexibility in the economy and is highly unlikely and labor does not grow at the same pace as capital and output (knife edge growth path) if n> output growth (ΔY/Y) then unemployment and declining per capita income if n< output growth (ΔY/Y) economy is only in equilibrium only if labor capital and output all grow at the rate g so g=s/v-d = n (pop growth) which never happens The ICOR rises when capital rises as a result of a more capital intensive economy no room for the role of productivity growth

Three Vignettes

Malaysia which shows economic growth Ethiopia which shows stagnation Ukraine which shows transition from one economic system to another

The Three Vignettes - Malaysia

Malaysia- In the 1970s American and Japaneses electronic manufacturers were moving into export processing zones (EPZs) established by the Malaysian government to increase the availability of non agricultural, urban jobs in response to a high unemployment rate, low labor costs in Malaysia (East Asian Tiger) Income for the average Malay quadrupled between 1970 and 2010 as well as improvement in adult literacy and the ratio of girls to boys in school, transitioned out of agriculture into a much more tech based economy

Purchasing Price Parity (PPP)

Nontraed goods and services -Goods that do not and cannot enter into international trade like haircuts and education and land and homes and buildings Exchange rates are largely influenced by international trade (market determined exchange rates) so they do not accurately reflect the non traded goods so you can calculate a PPP exchange rate to equate non traded good values and compare currencies and GDP Also exchange rates fluctuate quite a bit , so they use a annual average and they can be distorted through policies Market exchange rates overstate the degree to which rich countries have larger GDPs than poor countries because they do not take into consideration the non tradable goods which are cheaper in poor countries PPP cannot really account for quality discrepancies

Why Africa Grows Slowly- Policy vs Destiny

Policy or Destiny Destiny- geography and demography almost fully account for Africa's slow growth rests largely upon the lack of a demographic transition to lower fertility rates in Africa, as has happened in most of Latin America and Asia. population has remained in the interior because of the failure of Africa's coastal cities to grow. In turn, this is partly because the failure to industrialize has slowed urbanization Africa's landlocked economies trade with Europe, so that neighboring countries are an obstacle rather than a market. These patterns of trade are partly a legacy of the colonial economy More recent experience tends to argue that destiny plays less of a role than policy. After all, the economies of Africa did grow relatively quickly through the first half of the 20th century, and up until the early 1970s, which tends to argue that they were not obviously destined for lower growth. poor infrastructure, poor contract enforcement and volatile policies all make the supply of inputs unreliable It has lower per capita income and so could benefit from a convergence effect with richer countries, and it has higher aid inflows and so could benefit from aid-induced growth. If public policies were as good as in other regions, aid and convergence should enable even those countries which are land- locked and tropical to grow more rapidly than other developing regions for several decades

What makes a country poor?

Resources-availability, allocation (resource curse) Geography Social Dynamics- Spain leisure time Cultural- hard to implement globalization if traditional cultural ideology is conflicting Political- authoritarian, stability of institutions, education Historical influence External-trade,debt Recognition of Property Rights-if you don't have confidence that you own something then you wouldn't have incentive to invest in it Efficiency of labor force (human and tech growth, TFP)

Characteristics of Poverty

Rural poverty > Urban Poverty Poverty is related to undernutrition self employed, landless one percent growth of per capita income led to 1.2 percent increase in incomes of the poor, 1.2 is the average for the data set Certain types of growth (better agricultural productivity) has greater impact on reduction of poverty, the expansion growth of of higher skilled employment does not necessarily reduce poverty if initial level of inequality is high a smaller share of population will be able to have better returns to growth social policies

Is economic growth desirable

Some decry the spread of materialism and westernization of world cultures and the destruction of traditional societies, environmental degradation, insatiable consumerism, WOMD, high levels of stress etc W. Arthur Lewis wrote the case for economic growth is that it gives man greater control over his environment and thereby increases his freedom

Growth Accounting

TFP- Total factor productivity measures the contribution to production of efficiency technology and other influences on productivity Production function measures contributions of labor force additions to capital stock and growth in TFP- gy = (Wk x gk) + (Wl x gl) + a gy= growth of total income (GDP), gk and gl are the growths of capital stock and the labor force respectively, and Wl and Wk represent the shares in total income of wages and capital respectively (always adds to 100 percent) a represents the total change in TFP (Wk x gk) + (Wl x gl) describe movements along the production function and TFP growth results in an upward shift of the production function solve for a endogenously , a is called the Solow Residual but a represents so many influences that its hard to tell whats actually happening and a is often erroneously calculated because everything else is poorly estimated, a is basically a measure of our ignorance

Head count index

The ratio of the number below the poverty line to total population

Three Vignettes- Ukraine

Ukraine became independent from the Soviet Union in 1991 which had terrible consequences with trade with Russia Mismanagement of the local economy led to hyperinflation in 93' and 94' which destroyed the purchasing power of pensioners (fixed income) Medicine became hard to obtain and life expectancy dropped four years (62) between 1989 and 1995 Instead of independence stimulating foreign investment, there was the foreign purchase and disassembling of factories (sold off all their assets) Precept income in 98' was only 40 percent of its pre transition peak in 89' this all happened in a country where people are well educated began to rebound in the 2000s but the financial crisis hit Ukraine especially hard because of a sharp decrease in the demand for steel (economy shrank by 15%) Educated country

Competitive market factor share income

W= Price x (Marginal Product of Labor) the Marginal Product of Labor is the change in output over the change in labor all other things held constant (dY/dL) with capital constant so you can take the partial derivative and plug it into the share of labor income WL/PL and cancel out and you get 1-α... see notes share of capital income rk/PY = α

Increase in saving rate Solow

an increase in the saving rate shifts the investment curve up so in the short run saving per worker exceeds the capital widening line so k gradually increases until a new steady state is reached, during this time the economy grows faster than in steady state but this is temporary different steady states lead to different levels of output per worker and different steady states, convergence occurs when two countries have the same savings rates in the long run and the same population growth

Poverty measurements Poverty line Relative Measure

can be measure in terms of income or consumption income fluctuates over time whereas consumption fluctuates less, difficult to collect income data, peoples earned income might be low but they engage in subsistence farming and consume more than indicated Use the cost of the minimum nutritional standard + the cost of other necessities = poverty line/threshold If Yi (income of household) < Yp (poverty line) = poor Poverty rate (head count ratio) =#of poor/ population x 100 people who earn less than 60 percent of national average before housing costs

Solow Model

capital output and capital labor ratios vary isoquants are curved rather than L shaped Put it in per worker terms Y/L=F(K/L, 1) y=f(k) diminishing returns to capital Δk=sy-(n+d)k as savings per worker increases so does investment per worker and the capital stocker worker k grows Δk is negatively related to population growth Depreciation erodes capital stock when sy is larger than the new capital required to compensate for an increase in labor and deprecation capital per worker increases Capital deepening is increasing the amount of capital per worker Capital widening occurs when sy is exactly equal to (n+d)k so capital stock is just keeping pace with the expanding labor force and depreciation

Isoquants

combinations of the inputs (labor and capital) to produce equal amounts of output, fixed coefficient production function, capital-labor ratio is the same for every given output with this type of production function if more workers are added without investment in more capital output does not rise because more workers are useless without more capital constant returnes to scale so if capital is doubled and labor is double output doubles

International Inequality

compares average incomes across countries, appropriate application is when discussing convergence theories China India and the US, the three most populous countries in the world, have all experience economic growth accompanied by rising domestic Gini coefficients

Unconditional Convergence

countries with the same savings rates population growths and deprecation rates and thus the same steady state level of capital and income per capita countries will converge, they countries must have the same production functor and access to the same technology convergence has happened for some countries but not most, in fact there has more so been a divergence of incomes for these countries

Gini Coefficient

derived from the lorenz curve that displays inequality is the area of A ( the deviation from the 45 degree line showing the real world level of inequality) divided by the are of A+B ( the total potential for inequality) the Gini coefficient is between 0 (equality) and 1 (perfect inequality) .6 and above is really high inequality

Millennium Development Goals

document that states a commitment to making the right to development a reality for everyone and to freeing the entire human race from want Goal 1: Eradicate extreme poverty and hunger 2:primary universal education 3:gender equality and promote women 4:reduce child mortality 5: Improve maternal health 6: comabt HIV/AIDS and other disease 7: ensure environmental sustainability 8: develop a global partnership for development

Globalization

economic globalization is the integration of national economies into the international economy through trade in goods and services, FDIs, short term capital flows, international movement of people and flows of technology,

China's Workers

fall in factor share income attributed to wages real wages have been growing at a decent rate of about 7 per cent a year. What it does imply is that real wages have been growing more slowly than productivity. China has a distorted financial, especially banking, system, resulting in cheap and easy credit, at least to those state-owned enterprises that get it Capital has become even cheap relative to labour, contributing to rising investment, from 35 per cent of GDP in 2000 to nearly 45 per cent in 2006, and a growing capital intensity of production-- The rising capital intensity of production should have reduced the returns to capital, so that the total income accruing to capital should have declined but this didn't happen public pressure will force the government to share the large returns to capital with savers, thereby improving household investment income, but the government has been forced to list more firms in the stock market so that households can enjoy some of the high returns that companies are making. Households have also been investing heavily in the real estate market. But this government strategy has limits because stock and real estate prices are exceptionally high, and as they return to earth, households could be left with depreciated assets and poor returns

Growth accounting

gY=a+αgK + (1-α)gL so can rearrange and solve for a (TFP) a=gY-αgK - (1-α)gL change in a is due to technology health and education and policy environment as well as better institutions World bank did a study called the East Asian Miracle between 1965 and 1990 and reported that over this period savings rates increased by about 20% other than in Japan (already had been saving a lot), literacy rates increased and labor participation rates increased, about 1/3 came from TFP and 2/3 came from other factor inputs like capital and labor

Easterlin Paradox ???????????

happiness and life satisfaction are correlated but not perfectly identical

What else causes inequality

historical land ownership, mineral wealth , politics that have to do with land distribution and property rights

Economic Development

improvements in health education and other aspects of human welfare, sustained economic development cannot occur without economic growth Uses HDI (and adjusted HDI) to quantify the development e.g. Nigeria 2014 GNI per capita $2970 which is up 5.09% from 2013 Life expectancy of 52 in 2013 Kenya 2014 GNI per capita $1290, growth rate 1.69% Life expectancy of 61 in 2013 must look at other development factors

New models

increasing returns to scale , doubling capital and labor more than doubles output due to positive externalities like the knowledge gained from the invention of a car spilling over into other tech countries with increasing returns to scale do not necessarily reach a steady state level of income due to endogenous growth

Factor accumulation

increasing the size of capital stock or the labor force

Human Development Index

index created to measure the determinants of human development to live a decent life-to live a long and healthy life, acquire knowledge and to have access to resources Uses life expectancy for living a long and healthy life Uses mean years of schooling achieved by adult population as wells the expected years of schooling for children of school going ages Uses GNI per capita (PPP in US$) for access to resources (takes logs of dollar value to make them diminishing returns to scale because the marginal utility of the dollar decreases as income increases) To aggregate the 3 dimensions of the HDI you must now take the geometric mean because unlike the arithmetic mean if there is low achievement in one dimension it cannot be compensated by an increase in another dimension because the 3 dimensions are not linearly correlated

Notes on Growth

long run economic growth may be the single most fundamental determinant of human welfare around the world despite effort and progress we remain far from a complete and policy relevant understanding of deep determinants of growth

Poverty Trap

low saving leads to low investment and low income and more low saving Sachs argues for massive transfer of resources low income leads to high child mortality and high fertility and then more low income need higher income so lower child mortality and lower fertility so higher income per capita

Defining the rich-poor dichotomy

low-income economies-less than $1005 lower middle income economies with incomes between $1006 and $3975 upper middle income between $3976 and $12275 high income over $12275 a system ( GDP per capita) created by the world bank in the 1970s to evaluate how long countries will take to repay loans only 12% of the world is low income economy whereas 25 years ago half of the worlds population was low income

Characteristics of Rapidly growing countries

macroeconomic and political stability investment in health and education- countries with longer life expectancy tend to grow faster, healthier and more productive labor force, education help support growth and growth generates the resources to finance stronger educational systems effective governance and institutions-need rule of law, property rights, minimal corruption etc favorable environment for private enterprise- protecting farmer's interests,policy environment for small scale business and manufacturing Trade, openness and growth Favorable Geography- there are no rich countries between the tropic of cancer and the tropic of capricorn other than singapore, not being landlocked and not being isolated are helpful

Defining Developing Countries

meaningless term, every country is growing and developing or at least undergoing periods of change must distinguish between "developing" and transition countries like China can also classify by per capita income continuum

Translating economic growth into economic development, Amartya Sen

money is a means to an end not an end in itself so economic growth can lead to economic development Amartya Sen states that the goal development is to expand the capabilities of people to live the lives they choose to lead Four broad factors that affect how well income can be converted into the "capability to live a minimally acceptable life" Personal heterogeneities- proneness to illness, age etc environmental diversities: shelter clothing and fuel variations in social climate: impact of crime, civil unrest differences in relative deprivation- the extent at which being impoverished reduces ones capability to take part in the life of the greater community

Concerns with the HDI

only 3 dimensions diminishing returns to income but not life expectancy or schooling geometric average is sensitive to low numbers scubas low income In the 2015 Human Development Report not only do they have an HDI breakdown but they have an inequality adjusted HDI, a Gender development index which is an HDI for females and males, a Gender inequality index that looks at Female health, empowerment and the female position in the labour market, and a multidimensional Poverty Index

Sachs- Institutions matter but not for everything

says the role of institutions matter but more importantly is the environment and geography's influence on resources, disease, barriers to trade etc It is probably true that when human capital is high enough in any location, physical capital will flow in as a complementary factor of production Landlocked and at a high altitude, Denver can still serve as a high-tech hub of tourism, trade, and infor- mation technology There are countries where einstitutions, policies, and geography are all reasonably favorable, countries that are relatively well endowed geographically but, for historical reasons, have had poor gov- ernance and institutions. Then there are countries that are impoverished regions with an unfavorable geography, such as most of sub-Saharan Africa, central Asia, large parts of the Andean region, and the highlands of Central America, where globalization has not succeeded in raising living standards and may, indeed, have accelerated the brain drain and capital outflows from the region. Migration would be the purest free market approach to leaving isolated countries, yet the international system denies that option on a systematic basis; migration is systemically feasible only within countries A fourth and longer-term strategy that merits considera- tion is regional integration: a breaking down of artificial political barriers that limit the size of markets and condemn isolated countries to relative poverty

Tech Growth Solow

tech growth allows for economic growth when a country is in steady state TFP includes improvements in physical infrastructure increased education of the labor force and improvements in regulatory environments and incentives Incorporate tech into production function: Y=F(K, T x L) TxL is known as labor augmenting (effective units of labor because it measures bot h labor and its efficiency in the production process) because as T improves productivity of labor rises T can rise from tech or in terms of human capital technology grows at constant rate θ (ΔT/T) to show tech growth in the model we must turn the production function into output per effective worker so that: ye=f(ke) where ye=Y/TxL and ke= K/TxL effective labor grows at n + θ capital accumulation equation turns into: Δke=sye-(n+d+θ)ke (n+d+θ)ke > (n+d)k indicating that more capital is needed to keep capital per effective worker constant in the steady state output per effective worker is constant rather than output per worker, total output grows at n + θ so that output per worker grows at θ therefore industrialized countries never seem to reach a steady state with a constant output per worker but instead historically have output per worker growth of 1 to 2 percent annually as a result of growing at rate θ drawback to slow is that tech growth it exogenous been called manna from heaven

Harald Domar Framework

the fixed coefficient constant returns to scale production function based on the real world observation that some labor is unemployed and proceed on the basis that capital is the binding content on production and growth the production shows that output is a linear function of capital Y=1/v x K or Y=K/v where v is a constant (v is the capital output ratio because rearranging the terms we find v=(K/Y) the capital to output ratio provides an indication of the capital intensity of the production process and differs across countries due to differences in tech to produce the same goods or they produce aa different mix of goods and differences in efficiency, a larger v can indicate less efficient production Harrod Domar Relationship g=(s/v)-d

Questions:

why is economic growth only measured in averages rather than median? Can't the GDP of a country at 2 percent growth double the average income every 35 years but that doesn't account for the full distribution of income Answer: Collecting data is difficult (revolves around how taxes are reported) when so many people work off the books in most countries around the world so you must use an average. economic development definition can include transition from agriculture production toward manufacturing goods and services but although the US is heavily serviced based isn't our biggest export agriculture? Kahneman and Deaton (2010) have shown that there is a virtually no gain in human development and well-being from annual income beyond $75,000. How can they determine that number? Will we be calculating PPPs or will they be included in the given GNI equation every time

Solow Model Cont.

y=f(k) shows that output per worker depends on capital per worker Δk=sy-(n+d)k says that the change in capital depends on saving labor and depreciation The relationship between saving and growth is not linear in the Solow model unlike the Harrod Domar model because of diminishing returns to capital in the production function steady state where sy=(n+d)k the change in capital per worker can be seen graphically as the vertical distance between the sy curve and the depreciation line (aka capital widening line) to the left of steady state the saving exceeds deprecation and labor growth so capital deepening and the economy shifts right until it reaches steady state and vice versa with shrinking economies although output per worker is constant in the long run steady state value, output continues to grow at n (and gA) and similarly GDP continues to grow while GDP per capita remains the same, likewise in steady state total capital and total savings grow