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Economics 121: The Macroeconomics of Development Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA 94305-6072, U.S.A. Spring 2000-2001 Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau Review Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA 94305-6072, U.S.A. Spring 2000-2001 Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau The Historical Experience of Economic Development The characteristics of economic development Demographic transition Decline in mortality and morbidity Rise in life expectancy Decline in the fertility and birth rates Sustained growth in real output per capita Industrialization Urbanization Sustained rise in literacy and educational achievement Sustained improvements in life expectancy and other health status indicators An equitable distribution of income Lawrence J. Lau, Stanford University 3 The Sources of Economic Growth Measured Inputs Technical Progress Tangible Capital Labor Human Capital R&D Capital Intangible Capital (Human Capital, R&D Capital, Goodwill (Advertising and Market Development), Information System, Software, etc.) Other Omitted and Unmeasured Inputs (Land, Natural Resources, Water Resources, Environment, etc.) Improvements in Technical and Allocative Efficiency The traditional growth-accounting formula The sources of economic growth in developed and developing countries Lawrence J. Lau, Stanford University 4 Cross-Country Growth Regressions Concepts of convergence Absolute convergence of real GDP per capita Conditional convergence of real GDP per capita Convergence in technology Lawrence J. Lau, Stanford University 5 Models of Economic Development Two-Gap Models Savings gap Foreign exchange gap Two-Sector Models Dual Economy Models with and without Surplus Labor Characteristics of the Lewis Model Zero marginal productivity of labor in the agricultural sector--agricultural output is fixed Constant real subsistence wage rate in agriculture--institutionally determined Landlords and capitalists save; laborers consume Marginal productivity of labor higher in the industrial sector than in the agricultural sector Migration of labor from the agricultural sector to the industrial sector raises aggregate real output of the entire economy Lawrence J. Lau, Stanford University 6 Savings and Capital Accumulation The relationship among savings rate, capital accumulation, and the level and rate of growth of real GDP per capita Determinants of savings Savings and investment Lawrence J. Lau, Stanford University 7 The Role of Money and Finance The “Quantity Theory of Money”: MV=PT or V=PT/M V V rises with technical progress in the transactions technology as defined cannot be measured because T is not directly observed; instead, one can define an alternative velocity variable V*=PY/M in terms of observable variables--V*= PT/M x Y/T = V x Y/T = V/ The variable =T/Y, the ratio of the total real volume of all transactions T to Y is non-constant but changes over time The volume of transactions relative to real GDP (T/Y) tends to rise in the process of economic development T/Y also rises with financial deepening T/Y rises with rising volume of trade with the same trade surplus/deficit Inflation and money supply The role of financial intermediation Evolution of long-term markets Lawrence capital J. Lau, Stanford University 8 Stabilization in Closed and Open Economies Insufficient aggregate demand Excess aggregate demand Inflation and taxation Current and capital account balance Exchange rate policy The causes of the East Asian currency crisis Lessons from the East Asian currency crisis Lawrence J. Lau, Stanford University 9 Development Policies and Strategies Big Push versus Balanced Growth Export Promotion versus Import Substitution The infant industry argument Central Planning versus Market The role of foreign capital Lawrence J. Lau, Stanford University 10 Human Capital, Intangible Capital, and Infrastructural Capital The distinction between social and private rates of return Appropriability Network externalities Justification for public investments and/or subsidies Lawrence J. Lau, Stanford University 11 Endogenous Economic Growth Technical progress as the outcome of purposive activity Motivation is the possibility of monopoly profit Technological increasing returns to scale and market increasing returns to scale Increasing or constant returns to knowledge capital at the microeconomic level is neither necessary nor sufficient for increasing returns to scale at the macroeconomic level in knowledge capital, tangible capital and labor Lawrence J. Lau, Stanford University 12