🗊Презентация Economic growth. Technology, empirics, and policy

ECONOMIC GROWTH II: ECONOMIC GROWTH II: TECHNOLOGY, EMPIRICS, AND POLICY

9-1 Technological Progress in the Solow Model 9-2 From Growth Theory to Growth Empirics 9-3 Policies to Promote Growth 9-4 Beyond the Solow Model: Endogenous Growth Theory 9-5 Conclusion

Our analysis of the forces governing long-run growth Tasks: 1st to make the Solow model more general and realistic. The Solow model does not explain technological progress but, instead, takes it as exogenously. 2nd to move from theory to empirics. The Solow model can shed much light on international growth experiences, but it is far from the last word on the subject. 3d to examine how a nation’s public policies can infl uence the level and growth of its citizens’ standard of living. Should our society save more or less? How can policy infl uence the rate of saving? Are there some types of investment that policy should especially encourage? What institutions ensure that the economy’s resources are put to their best use? How can policy increase the rate of TLP? The Solow growth model provides the theoretical framework within which we consider these policy issues. 4th to consider what the Solow model leaves out. We examine a new set of theories, called endogenous growth theories, which help to explain the TLP that the Solow model takes as exogenous.

9-1 Technological Progress in the Solow Model where E is the efficiency of labor. the available technology improves, the efficiency of labor rises, and each hour of work contributes more to the production of goods and services. The term L * E can be interpreted as measuring the effective number of workers. L measures the number of workers in the labor force, L × E measures both the workers and the technology with which the typical worker comes equipped. The simplest assumption about TLP is that it causes the E to grow at some constant rate g. For example, if g = 0.02, then each unit of labor becomes 2% more efficient each year: output increases as if the labor force had increased by 2 percent more than it really did. This form of TLP is called labor augmenting, and g is called the rate of labor-augmenting T/LP. The L is growing at n, and the E is growing at g, the L × E is growing at n + g. 90

9-1 Technological Progress in the Solow Model Because T/LP is modeled here as labor augmenting, it fits into the model in much the same way as population growth. When there was no T/LP, we analyzed the economy in terms of quantities per worker; We now let k = K/(L × E) stand for capital per effective worker y = Y/(L × E) stand for output per effective worker. => y = f(k). Δk = sf(k) − (δ + n + g)k. to keep k constant, δk is needed to replace depreciating capital, nk is needed to provide capital for new workers, gk is needed to provide capital for the new “effective workers” created by T/LP.

9-1 Technological Progress in the Solow Model The Efficiency of Labor The Steady State With Technological Progress The Effects of Technological Progress

9-1 Technological Progress in the Solow Model The Efficiency of Labor The Steady State With Technological Progress The Effects of Technological Progress

9-2 From Growth Theory to Growth Empirics Balanced Growth Convergence Factor Accumulation Versus Production Efficiency

9-2 From Growth Theory to Growth Empirics Balanced Growth Convergence Factor Accumulation Versus Production Efficiency

9-2 From Growth Theory to Growth Empirics Balanced Growth Convergence Factor Accumulation Versus Production Efficiency

9-2 From Growth Theory to Growth Empirics Balanced Growth Convergence Factor Accumulation Versus Production Efficiency

9-2 From Growth Theory to Growth Empirics Balanced Growth Convergence Factor Accumulation Versus Production Efficiency

Is Free Trade Good for Economic Growth? At least since Adam Smith, economists have advocated free trade as a policy that promotes national prosperity. Today, economists make the case with greater rigor, relying on David Ricardo’s theory of comparative advantage as well as more modern theories of international trade. According to these theories, a nation open to trade can achieve greater production efficiency and a higher standard of living by specializing in those goods for which it has a comparative advantage. 1 approach is to look at international data to see if countries that are open to trade typically enjoy greater prosperity. The evidence shows that they do. 2nd approach is to look at what happens when closed economies remove their trade restrictions. Once again, Smith’s hypothesis fares well. 3rd approach to measuring the impact of trade on growth, proposed by economists Jeffrey Frankel and David Romer, is to look at the impact of geography. Some countries trade less simply because they are geographically disadvantaged.

9-3 Policies to Promote Growth The U.S. economy is at, above, or below the GR SS? we need to compare MPK − δ with the growth rate of total output (n + g). At the GR SS: MPK − δ = n + g. If the economy is operating with < capital than in the GRSS, then Diminishing MPC tells us that MPK − δ > n + g. → ↑ing the s => to ↑ capital accumulation and economic growth a SS with ↑er K (although K will be ↓er for part of the transition to the new SS). If the economy has > capital than in the GR SS, then MPK − δ < n + g. → capital accumulation is excessive: reducing the s => to ↑er K both immediately and in the long run.

9-3 Policies to Promote Growth Example: Real GDP in the U.S. grows an average of 3% per year n + g = 0.03. We can estimate the net MPC from: 1. The CS is about 2.5 times one year’s GDP. k = 2.5y 2. Depreciation of capital is about 10% of GDP. δk = 0.1y 3. Capital income is about 30% of GDP. MPK × k = 0.3y We solve for the rate of depreciation by dividing equation 2 by equation 1: δk/k = (0.1y)/(2.5y); δ= 0.04. And we solve for the MPK by dividing equation 3 by equation 1: (MPK × k)/k = (0.3y)/(2.5y); MPK = 0.12.

9-3 Policies to Promote Growth Evaluating the Rate of Saving Changing the Rate of Saving Allocating the Economy’s Investment Establishing the Right Institutions Encouraging Technological Progress

9-3 Policies to Promote Growth Evaluating the Rate of Saving Changing the Rate of Saving Allocating the Economy’s Investment Establishing the Right Institutions Encouraging Technological Progress

9-3 Policies to Promote Growth Evaluating the Rate of Saving Changing the Rate of Saving Allocating the Economy’s Investment Establishing the Right Institutions Encouraging Technological Progress

9-3 Policies to Promote Growth Evaluating the Rate of Saving Changing the Rate of Saving Allocating the Economy’s Investment Establishing the Right Institutions Encouraging Technological Progress

4 Industrial Policy in Practice Policymakers and economists have long debated whether the government should promote certain industries and fi rms because they are strategically important for the economy. In the United States, the debate goes back over two centuries. Alexander Hamilton, the fi rst U.S. Secretary of the Treasury, favored tariffs on certain imports to encourage the development of domestic manufacturing. The Tariff of 1789 was the second act passed by the new federal government. The tariff helped manufacturers, but it hurt farmers, who had to pay more for foreign-made products. Because the North was home to most of the manufacturers, while the South had more farmers, the tariff was one source of the regional tensions that eventually led to the Civil War. Advocates of a signifi cant government role in promoting technology can point to some recent successes. For example, the precursor of the modern Internet is a system called Arpanet, which was established by an arm of the U.S. Department of Defense as a way for information to fl ow among military installations. There is little doubt that the Internet has been associated with large advances in productivity and that the government had a hand in its creation. According to proponents of industrial policy, this example illustrates how the government can help jump-start an emerging technology. Yet governments can also make mistakes when they try to supplant private business decisions. Japan’s Ministry of International Trade and Industry (MITI) is sometimes viewed as a successful practitioner of industrial policy, but it once tried to stop Honda from expanding its business from motorcycles to automobiles. MITI thought that the nation already had enough car manufacturers. Fortunately, the government lost this battle, and Honda turned into one of the world’s largest and most profi table car companies. Soichiro Honda, the company’s founder, once said, “Probably I would have been even more successful had we not had MITI.” Over the past several years, government policy has aimed to promote “green technologies.” In particular, the U.S. federal government has subsidized the production of energy in ways that yield lower carbon emissions, which are thought to contribute to global climate change. It is too early to judge the long-run success of this policy, but there have been some short-run embarrassments. In 2011, a manufacturer of solar panels called Solyndra declared bankruptcy two years after the federal government granted it a $535 million loan guarantee. Moreover, there were allegations that the decision to grant the loan guarantee had been politically motivated rather than based on an objective evaluation of Solyndra’s business plan. As this book was going to press, the Solyndra case was under investigation by congressional committees and the FBI. The debate over industrial policy will surely continue in the years to come. The fi nal judgment about this kind of government intervention in the market requires evaluating both the effi ciency of unfettered markets and the ability of governmental institutions to identify technologies worthy of support. ■

9-3 Policies to Promote Growth Evaluating the Rate of Saving Changing the Rate of Saving Allocating the Economy’s Investment Establishing the Right Institutions Encouraging Technological Progress

The Colonial Origins of Modern Institutions International data show a remarkable correlation between latitude and economic prosperity: nations closer to the equator typically have lower levels of income per person than nations farther from the equator. This fact is true in both the northern and southern hemispheres. What explains the correlation? Some economists have suggested that the tropical climates near the equator have a direct negative impact on productivity. In the heat of the tropics, agriculture is more diffi cult, and disease is more prevalent. This makes the production of goods and services more diffi cult. Although the direct impact of geography is one reason tropical nations tend to be poor, it is not the whole story. Research by Daron Acemoglu, Simon Johnson, and James Robinson has suggested an indirect mechanism—the impact of geography on institutions. Here is their explanation, presented in several steps: 1. In the seventeenth, eighteenth, and nineteenth centuries, tropical climates presented European settlers with an increased risk of disease, especially malaria and yellow fever. As a result, when Europeans were colonizing much of the rest of the world, they avoided settling in tropical areas, such as most of Africa and Central America. The European settlers preferred areas with more moderate climates and better health conditions, such as the regions that are now the United States, Canada, and New Zealand. 2. In those areas where Europeans settled in large numbers, the settlers established European-like institutions that protected individual property rights and limited the power of government. By contrast, in tropical climates, the colonial powers often set up “extractive” institutions, including authoritarian governments, so they could take advantage of the area’s natural resources. These institutions enriched the colonizers, but they did little to foster economic growth. 3. Although the era of colonial rule is now long over, the early institutions that the European colonizers established are strongly correlated with the modern institutions in the former colonies. In tropical nations, where the colonial powers set up extractive institutions, there is typically less protection of property rights even today. When the colonizers left, the extractive institutions remained and were simply taken over by new ruling elites. 4. The quality of institutions is a key determinant of economic performance. Where property rights are well protected, people have more incentive to make the investments that lead to economic growth. Where property rights are less respected, as is typically the case in tropical nations, investment and growth tend to lag behind. This research suggests that much of the international variation in living standards that we observe today is a result of the long reach of history.

9-3 Policies to Promote Growth Evaluating the Rate of Saving Changing the Rate of Saving Allocating the Economy’s Investment Establishing the Right Institutions Encouraging Technological Progress

The Worldwide Slowdown in Economic Growth

9-4 Beyond the Solow Model: Endogenous Growth Theory Endogenous Growth Theory reject the Solow model’s assumption of exogenous technological change. Y = AK, Y is output, K is the capital stock, A is a constant measuring the amount of Y produced for each unit of K. PF does not exhibit the property of diminishing returns to capital. K = sY − Kδ. Y/Y = K/K = sA − δ. sA > δ, the economy’s income grows forever, even without the assumption of exogenous T/LP.

9-4 Beyond the Solow Model: Endogenous Growth Theory Y = F[K, (1 − u)LE] (PF in manufacturing firms), E = g(u)E (PF in research universities), K = sY − K (capital accumulation), u is the fraction of the labor force in universities 1 − u is the fraction in manufacturing, E is the stock of knowledge (efficiency of labor), g is a function that shows how the growth in knowledge ~ on the fraction of the labor force in universities. Assumtion: The PF for the MF have constant returns to scale. This model is a cousin of the Y = AK model. This economy exhibits constant returns to capital, as long as capital is broadly defined to include knowledge. Persistent growth arises endogenously because the creation of knowledge in universities never slows down. This model is also a cousin of the Solow growth model. If u is held constant, then the E grows at the constant rate g(u). This result of constant growth in the E of labor at rate g is precisely the assumption made in the Solow model with T/LP. For any given value of u, this endogenous growth model works just like the Solow model.

9-4 Beyond the Solow Model: Endogenous Growth Theory 2 key decision variables in this model. As in the Solow model, s determines the SS stock of K. u determines the growth in the stock of knowledge. s & u affect the level of income u affects the SS growth rate of income. Thus, this model of endogenous growth takes a small step in the direction of showing which societal decisions determine the rate of technological change.

9-4 Beyond the Solow Model: Endogenous Growth Theory 1. knowledge is largely a public goodю, much research is done in firms that are driven by the profit motive. 2. research is profitable because innovations give firms temporary monopolies, of the patent system there is an advantage to being the first firm on the market with a new product. 3. when one firm innovates, other firms build on that innovation to produce the next generation of innovations. These (essentially microeconomic) facts are not easily connected with the (essentially macroeconomic) growth models we have discussed so far. Some endogenous growth models try to incorporate these facts about

9-4 Beyond the Solow Model: Endogenous Growth Theory The Basic Model A Two-Sector Model The Microeconomics of Research and Development The Process of Creative Destruction

9-4 Beyond the Solow Model: Endogenous Growth Theory In his 1942 book Capitalism, Socialism, and Democracy, economist Joseph Schumpeter suggested that economic progress comes through a process of creative destruction. According to Schumpeter, the driving force behind progress is the entrepreneur with an idea for a new product, a new way to produce an old product, or some other innovation. Examples: In England in the early 19 century, an important innovation was the invention and spread of machines that could produce textiles using unskilled workers at low cost. Term “Luddite” refers to anyone who opposes technological progress. A more recent example of creative destruction involves the retailing giant Walmart.

9-5 Conclusion Long-run economic growth is the single most important determinant of the economic well-being of a nation’s citizens. The Solow growth model and the more recent endogenous growth models show how saving, population growth, and technological progress interact in determining the level and growth of a nation’s standard of living.