Transcript Convergence

Economic models
…are simplied versions of a more complex reality
• irrelevant details are stripped away
Used to
• show the relationships between economic variables
• explain the economy’s behavior
• devise policies to improve economic performance
A World of Rich and Poor
A Country of Rich and Poor
A Country of Rich and Poor
Are Poor Countries Catching Up?
Growth Rates vs. Per Capita Income for Currently Developed
Countries, 1870-1979
3.0
☻
Growth rate (%)
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☻●
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1.0
0
Per capita income in 1870 (1975 dollars)
Source: Barrow and Sala-i-Martin (1995).
2,000
Income Relative to U.S., 1988
GDP per Cap Relative to the U.S., 1960 vs. 1988 (log
scale)
Income Relative to U.S., 1960
Convergence
• Solow model predicts that, other things equal,
“poor” countries (with lower Y/L and K/L ) should
grow faster than “rich” ones.
• If true, then the income gap between rich & poor
countries would shrink over time, and living
standards “converge.”
• In real world, many poor countries do NOT grow
faster than rich ones. Does this mean the Solow
model fails?
Convergence
• No, because “other things” aren’t equal.
 In samples of countries with similar savings
& pop. growth rates,
income gaps shrink about 2%/year.
 In larger samples, if one controls for differences in
saving, population growth, and human capital,
incomes converge by about 2%/year.
• What the Solow model really predicts is conditional
convergence - countries converge
to their own steady states, which are determined by
saving, population growth, and education.
And this prediction comes true in the real world.
Prediction:
 Higher s  higher k*.
 And since y = f(k) ,
higher k*  higher y* .
 Thus, the Solow model predicts that countries
with higher rates of saving and investment
will have higher levels of capital and income
per worker in the long run.
International Evidence on Investment Rates and
Income per Person
Income p er
person in 1992
(logarithmic scale)
10 0, 00 0
Canada
Denmark Germany
U.S.
10 ,0 00
Mexico
Egypt
Fi nl and
Brazil
Pakist an
Ivory
Coast
U.K.
Israel
FranceItaly
Singapore
Peru
Indonesia
1, 00 0
Zimbabwe
India
Chad
10 0
Japan
0
Uganda
5
Kenya
Cameroon
10
15
20
25
30
35
40
Investment as p ercentage of output
(average 1960 –1992)
Prediction:
 Higher n  lower k*.
 And since y = f(k) ,
lower k*  lower y* .
 Thus, the Solow model predicts that
countries with higher population growth
rates will have lower levels of capital and
income per worker in the long run.
Income per
person in 1992
(logarithmic scale)
International Evidence on Population
Growth and Income per Person
100,000
Germany
U.S.
Denmark
Canada
Israel
10,000
U.K.
Italy
Finland
Japan
France
Mexico
Singapore
Egypt
Brazil
Pakistan
Peru
Indonesia
1,000
Ivory
Coast
Cameroon
Ke nya
India
Zimbabwe
Chad
100
0
1
2
Uganda
3
4
Population growth (percent per year)
(average 1960 –1992)
In the Solow model of Chapter 7,
 the production technology is held constant
 income per capita is constant in the steady
state.
Neither point is true in the real world:
 1929-2001: U.S. real GDP per person grew by
a factor of 4.8, or 2.2% per year.
 examples of technological progress abound
Examples of technological progress
• 1970: 50,000 computers in the world
2000: 51% of U.S. households have 1 or more computers
• The real price of computer power has fallen an average of
30% per year over the past three decades.
• The average car built in 1996 contained more computer
processing power than the first lunar landing craft in 1969.
• Modems are 22 times faster today than two decades ago.
• Since 1980, semiconductor usage per unit of GDP has
increased by a factor of 3500.
• 1981: 213 computers connected to the Internet
2000: 60 million computers connected to the Internet
“Living Standards” in the U.S.
What About Happiness?
Subjective well-being rankings of 82 societies
(based on combined Happiness and Life Satisfaction scores)
HIGH
Puerto Rico 4.67
Mexico
4.32
Denmark
4.24
Ireland
4.16
Iceland
4.15
Switzerland 4.00
N. Ireland
3.97
Colombia
3.94
Netherlands 3.86
Canada
3.76
Austria
3.69
El Salvador 3.67
Venezuela
3.58
Luxembourg 3.52
U.S.
3.47
Australia
3.46
New Zealand 3.39
Sweden
3.36
Nigeria
3.32
Norway
3.25
Belgium
3.23
Finland
3.23
MEDIUM HIGH
Saudi Arabia
Singapore
Britain
W. Germany
France
Argentina
Vietnam
Chile
Philippines
Taiwan
Domin.Rep.
Brazil
Spain
Israel
Italy
E. Germany
Slovenia
Uruguay
Portugal
Japan
Czech Rep
3.01
3.00
2.92
2.67
2.61
2.61
2.59
2.53
2.32
2.25
2.25
2.23
2.13
2.08
2.06
2.02
2.02
2.02
1.99
1.96
1.94
MEDIUM-LOW
S. Africa
Croatia
Greece
Peru
China
S. Korea
1.86
1.55
1.45
1.32
1.20
1.12
Iran
0.93
Poland
Turkey
Bosnia
Morocco
Uganda
Algeria
Bangladesh
Egypt
Hungary
Slovakia
Jordan
0.84
0.84
0.82
.74
0.67
0.57
0.54
0.52
0.41
0.40
0.39
LOW
Estonia
Serbia
Tanzania
Azerbaijan
Montenegro
India
Lithuania
Macedonia
Pakistan
Latvia
Albania
Bulgaria
Belarus
Georgia
Romania
Moldova
Russia
Armenia
Ukraine
Zimbabwe
Indonesia
0.24
0.21
0.13
0.13
0.06
0.03
-0.07
-0.14
-0.30
-0.70
-0.86
-0.87
-0.92
-1.11
-1.30
-1.63
-1.75
-1.80
-1.81
-1.88
-2.40
Can You “Buy” Happiness?
Income vs Happiness
6
Well-Being Score
5
4
3
2
1
0
-1 0
10,000
20,000
30,000
40,000
-2
-3
GDP per capita
50,000
60,000