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International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk Introduction Objectives / key terms New goods Variety / quality Kaldor's stylized facts Neo-classical growth model Solow residual Endogenous growth model Discount rate Geography experiment Paul Romer (1955 - ) International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk Modeling new goods The variety approach quantity q Nt = 0 Nt = 1 Number of varieties International Trade & the World Economy; Charles van Marrewijk Modeling new goods quality The quality approach 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 quality at t = 0 quality at t = 1 variety International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk Kaldor's stylized facts of economic growth Nicholas Kaldor (1961) suggested the following list of stylized facts: • The continued growth in the aggregate volume of production and in the productivity of labor at a steady trend rate. • A continued increase in the amount of capital per worker. • A steady rate of profit on capital. • Steady capital-output ratios over long periods. • A steady investment coefficient, and a steady share of profits and wages. International Trade & the World Economy; Charles van Marrewijk Kaldor's stylized facts of economic growth a. USA GDP per capita, 1985 US $, logarthmic scale 10 9 8 7 6 1870 1890 1910 1930 1950 1970 1990 International Trade & the World Economy; Charles van Marrewijk Kaldor's stylized facts of economic growth b. USA, gross investment (% of GDP) 30 20 10 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk The neo-classical model and the Solow residual 3 2 E skt G ( n)kt 1 F 0 0 5 10 capital-labor ratio k 15 20 International Trade & the World Economy; Charles van Marrewijk The neo-classical model and the Solow residual ~ ~ ~ ~ ~ ~ ~ ~ Yt t K t (1 ) Lt At Yt K t (1 ) L Solow residual technical change capital increase to be explained labor force increase 'explained' b. USA, actual growth and Solow residual (%) 6 4 2 0 1970 -2 1975 1980 1985 1990 -4 Solow residual actual growth 1995 International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk Empirical pictures c a 10 10 9 9 Australia Netherlands 8 8 Belgium Italy Austria Norw ay 7 Canada 7 6 1870 1890 1910 1930 1950 1970 1990 6 1870 1890 1910 1930 1950 1970 1990 Japan International Trade & the World Economy; Charles van Marrewijk Empirical pictures d a 9 9 Taiw an 8 8 Argentina 7 Chile Brazil 7 Philippines Thailand 6 6 Bangladesh 5 1900 1930 1960 1990 5 1900 1930 1960 1990 International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk Endogenous growth Paul Romer’s (1994) list of stylized facts: • There are many firms in a market economy. • Discoveries differ from other inputs in that many people can use them at the same time (nonrival goods). • It is possible to replicate physical activities. • Technological advance comes from things that people do. • Many individuals and firms have market power and earn monopoly rents on discoveries. International Trade & the World Economy; Charles van Marrewijk Endogenous growth Production function: 1/ Yt xit i 1 Nt N t(1 / )1 N t xt ; xit xt for all i LX / m Operating profit for manufactures producer t (1 ) L Nt Future profits discounted; profits erode if number of varieties increases Inventing new variety represents fixed cost; with knowledge spillovers economy steadily grows forever; growth rate higher if: • the labor force is higher (increasing returns to scale ensure that size is important) • the fixed costs of investment F are lower, and • the discount rate is lower. International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk An experiment in geographical economics Experiment w. 12 city racetrack; Herfindahl = measure of agglomeration Herfindahl index 0.5 0.4 0.3 0.2 0.1 0 0 200 400 600 800 International Trade & the World Economy; Charles van Marrewijk An experiment in geographical economics Evolution of the share of manufacturing 0.5 6 0.4 0.3 3 0.2 6 9 6 3 0.1 6 9 0 0 100 200 300 400 500 600 700 800 International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions International Trade & the World Economy; Charles van Marrewijk Conclusions Rising per capita income is relatively new phenomenon. Some countries have experienced relatively steady growth, others long periods of stagnation and rapid increases. Neo-classical model based on capital accumulation needs exogenous technological change to ‘explain’ growth; large Solow residual. Endogenous growth models based on imperfect competition and innovation (new goods and/or quality improvements) led by entrepreneurs in search of profits. Large swings in economic prosperity may be explained by geographical economics model.
