Download Growth Theories

Overview of Economic
Development Theories
“Frame of Reference”
Economic Growth Theories
•
Conventional Neo-Classical Models
(1) Harrod-Domar Model focusing on Capital
(2) Solow Model (Representative Neo-Classical Model)
focusing mainly on Capital and Technology
•
New Growth Models =Endogenous Growth Models
(3) Endogenous Growth Models
-Some taking Human Capital seriously
- World Bank Model taking Social Capital seriously
-Others focusing on Government Leadership, Natural Resources(Endowment),
financial development, etc.
- Some focusing on Value System of Specific Culture/Society
one of them is Japanese Economic Growth Model based on Neo-Cofuncianism
• Other Growth Models
(4) Lewis Model – focusing on Duality
(5) Rostow Model – focusing on Take-Off and Structural Changes
(1) Basic Features of
Conventional Neo-Classical Economics
1) Supply Matters
Economic growth = an Increase in aggregate
output comes from
an increase in L;
an increase in K; and/or
improvement of T
2) Aggregate Demand does not matter for longrun growth of income up to a certain stage of
development
-> In a developed country, a lack of demand can cause longtern stagnation
-> Until then,
Macroeconomic Policies of Government should
not matter for Y in the long-run
3) Specific Institutions do not matter
No room in production function for institutions, such as government
leadership, system; the only governing principle is competition and
efficiency.
4) Universality of the Model’s Application
All countries will go through the same process
Basic Math
• ‘aggregate production function’
Y = f (K, L; T)
• “Cobb-Douglas Production Function”:
Y = A K a L 1-a, and a<1
• Growth function
dY = f (dK, dL; dT)
•
*Why are the features of evolution of a
growing economy?
Anything that grows goes through a biological growth pattern- “S curve”
Stages of Acceleration (Youth) and Deceleration (Maturity)
In the end ther e will be Convergence
(1)Harrod-Domar model focuses simply on K
- How K is accumulated “The more K, the better”
- how efficiently K is used. “ICOR”
(2)Solow Model focuses on Savings/Capital Accumuati
on and Technology.
-There is a specific value of optimal saving rate
leading to the Golden Rule
- Excessive savings, or external injection
of capital is not dynamically
sustainable in the long-run.
- Eventually all countries converge with falling
growth rates as K rises.
- Only T innovation can lead to a ultimately Sustained growth
against the rule of Convergence,