Transcript A Simple Model of Growth and Development

A Simple Model of
Growth and Development
ECON 401: Growth Theory
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A Simple Model of Growth and Development
Address
- how technologies diffuse across countries and
- why the technology used in some countries is so
much more advanced than the technology used in others
Add: a component that models an avenue for technology
transfer
Assume: number of capital goods that workers can use is
limited by their skill level, h.
- A worker with a high skill level can use more capital
goods than a worker with a low skill level (e.g., computerized
machine)
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A Simple Model of Growth and Development
We are examining the economic performance of a single small
country, potentially far removed from the technological frontier.
This country grows by learning to use the more advanced capital
goods that are already available in the rest of the world.
We assume transformation is effortless. One unit of any intermediate
good can be produced with one unit of raw capital.

h(t )
0
x j (t )dj  K (t )
Aggregate production
technology is given by
Y  K a (hL)1a
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A Simple Model of Growth and Development
Capital accumulation equation is standard:
K  sK Y  dK
Skill, in this chapter, is defined as the range of
intermediate goods that an individual has learned to
use.
Is this similar to amount of time spent in school?
Individuals learn to use more advanced capital
goods according to:
h  meu Ag h1g
-u denotes the amount of time an individual spends
accumulating skill instead of working.
-A denotes world technology frontier.
- We assume m>0 and 0<g<1.
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A Simple Model of Growth and Development
- It is harder to learn to use an intermediate good that is currently
close to the frontier. The closer an individual’s skill level, h, to A, the
smaller the ratio A/h and slower his or her skill accumulation.
- The technological frontier evolves to evolve because of investment
in research by the advanced economies in the world.
- We assume that there is a world pool of ideas that are freely
available to any country.
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A Simple Model of Growth and Development
Steady State Analysis:
Both investment rate and the amount of time individuals spent
accumulating skill are given exogenously and are constant.
Along a balanced growth path, we must have:
gy= gk= gh= gA= g
(6.6)
The growth rate of the economy is given by the growth rate of
human capital or skill and this growth rate is tied down by the
growth rate of the world technological frontier. Output per worker
along the balanced growth path is given by:


sK
y * (t )  

n g d 
a / 1 a
1/ g
 m u 
 e 
g

A * (t )
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A Simple Model of Growth and Development
Economies, in this model, grow because they learn to use new ideas
invented throughout the world.
-Economies that invest more in phsical capital will be richer
-Economies that have high population growth rates will be poorer
-Economies that spend more time accumulating skills will be closer
to the technological frontier and will be richer.
-The engine of growth in this model is also technological change.
Model also answers why different economies have different levels of
technology.
 Skill levels of individuals are different. Individuals in
developed countries have learned over the years to use very
advanced capital goods (invested more time).
Implicit assumption: technologies are available worldwide for
anyone.
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A Simple Model of Growth and Development
Technology transfer occurs because individuals in an economy learn
to use more advanced capital goods.
 Assumes the designs for new capital goods are freely
available
 Technology transfer is likely to be more complicated (e.g.,
designs need to be altered)
 Issue of international patent protection

Cost of adapting or licensing
Key implication of the model: all countries share the same long-run
growth rate.
In models based on diffusion of technology, this is typical.
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A Simple Model of Growth and Development
How does this prediction match up with the empirical evidence?
 We saw in Chapter 1 that there are enormous differences in growth
rates across countries even in the long-run.
 This does not necessarily contradict this prediction. Why?
 Transition dynamics
Figure 6.1 illustrates US and UK GDP per capita over the last 125
years. From 1870 to 1994, US grew at an average rate of 1.8% while
UK grew at 1.3%.
- A close look at the growth rates, however, indicates the growth rates were
1.95% and 1.98% from 1950 to 1994.
This example suggest that we have to be careful in interpreting the
differences in average growth rates across economies.
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