Why do some countries have much higher levels of income per capita than others?
Why do some countries grow (in terms of their output or income per capita) faster than others?
From a public policy perspective: what are optimal policies to promote growth?
Growth depends on two processes: the accumulation of assets (such as capital, labor, and land), and making those assets more productive.
[...] On the vertical axis real growth rates and horizontal Harrod-Domar model. If it was true, the line should be sitting on the 45 degrees. Diminishing returns and the convergence debate Combining a variable input with a fixed input will increase output but at a declining rate. Example: Krugman says that the growth of Asia is mainly input-driven, so it will soon experience diminishing returns Given a fixed plot of land, as you add more and more farmers without increasing the size of the land, there will be a point where nothing can be produced since farmers will be standing side by side with each other. [...]
[...] All in all, it does a much better job of describing real-world outcomes than the Harrod Domar model and provides simple yet powerful insights into the role of technological change and productivity growth in the growth process. Weaknesses But where does this technology come from? To Solow, technology is `manna from heaven', or exogenous (`What it illuminates, does not really matter; what matters, it does little to illuminate'). Technological capability is something a nation develops and builds). You assume that technology comes from the sky although people work for their discoveries. [...]
[...] The model: A = technology, was thus introduced in the growth model for the first time. Technology can cause growth in the slides) Y = F TxL) capital per worker = machine/worker for example. The model is expressed in per capita terms, thus: Y/L = A f or per capita output is determined by capital per worker. Y/L is denoted as y and K/L as k The model assumes diminishing returns to capital as denoted by the slope of the production function y = Capital per worker is determined by 3 variables Investment (savings) per worker Population growth (denoted by increasing population decreases the level of capital per worker, k. [...]
[...] Solow growth accounting: debate on Asian miracle Going back to Asia, the causality debate has two camps: Accumulationnists (growing by perspiration): growth in Asia merely reflected growth in inputs (labor supply, capital accumulation). Assimilationists (growing by inspiration): growth in Asia was due to their mastery of new technology. Basically, it is a `war of numbers' involving the size of the `Solow residual' (what cannot be accounted for, so it's counted for technological progress. It's called the residual because many factors can represent growth). [...]
[...] If we assume constant rates of tech change Growth in effective supply of labor is n+θ The technological progress shifts the production function upward as the output per worker increases. At the steady state, we say that the `output per effective worker' is constant, rather than just output per worker. The total output now grows at the rate n + θ, so that output per actual worker (or income per person) increases at rate θ. Hence, the observed steady economic growth (in income per capita) is explained by (exogenous) rate of technological change. Strengths and weaknesses Strengths It allows for flexibility of factor proportions in the production process. [...]
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