Econ Of Globalization. Week 3

Front 1

In _____ , U.S. income per capita was 3.5 times larger than Japan and 6.6 times larger than India

Back 1

1900

Front 2

In __________ , U.S. income per capita was only 1.3 times larger than Japan and 14.7 times larger than India

Back 2

2000

Front 3

Output per worker is a function of

Capital: building, machines, computers, etc.
Labor: number of workers, hours worked, etc.
TFP: education, skills, know-how, etc.

Mathematically:
Y = f (K,L,A) where K is the capital stock, L is the labor supply and A is TFP.

Back 3

Capital
Labor
Total Factor Productivity

Front 4

Y/L = F(K/L,1,A)
y = A F(k)

Back 4

Solow’s growth model production function:

Front 5

We assume that all countries have the same production function and access to technology. Also the economy is a close economy (S = I).

If low level of capital per worker and low level of income per worker, then poor country

If high level of capital per worker and high level of income per worker, then rich country

Back 5

Convergence

Front 6

- transition for capital per worker, k, as it rises from its initial value, k(0), to its steady-state value, k*

- k* works like a target or magnet for k during the
transition.

- k* depends on the saving rate, s, the technology level, A, the population growth rate, n, the depreciation rate, , and the initial level of labor input, L(0). We can summarize these results in the form of a function for k*:

Back 6

Convergence

Front 7

This idea of economic catch-up is also know as

As is, the countries are converging to the same steady-state.

Back 7

convergence

Front 8

Growth rate of Y/L should be negatively related to the initial level of Y/L. Countries with initial low levels of Y/L should have subsequent higher growth rates.

Therefore there is a negative relationship between the growth rate of GDP per capita and the initial level of GDP per capita.

Back 8

The Convergence Hypothesis

Hypothesis

Front 9

Strong evidence of convergence among industrial countries since 1960

The evidence for convergence since 1960 does not extend to the world as a whole

Back 9

Cross Country Growth in the Long Run : Testing the Convergence Hypothesis

Front 10

Countries may have different steady states –

Back 10

Conditional convergence

Front 11

Some variables that can cause differences in growth rates of income per capita or levels of income per capita among countries :

Back 11

Saving rates
Population growth
Measures of human capital
Political variables
Openness to trade
Market distortions
The fractions of primary products in total exports
Geographic variables

Front 12

Distance from the equator is highly correlated to income per capita. Countries far from the equator are relatively rich, and countries close to the equator are relatively poor.

What causes the relation between geography and income?

Does geography affect growth directly, or does the effect operate through social institutions?

Back 12

Geography, Institutions and Growth

Front 13

Most of the differences in income per capita across countries can be explained by geographic, climatic, and ecological differences.

Tropical regions (centered near the equator) have grown at a slower rate than temperate regions (north or south of the tropics).

Back 13

The geography hypothesis

Front 14

Differences in social infrastructure can explain much of the variation of levels of income per capita across countries beyond what can be accounted for by physical capital and human capital

Distance from the equator is a _________ for the influence of Western Europe, the first region to implement a social infrastructure favorable to production, on the rest of the world

Back 14

proxy

Front 15

focus on investments in research and development , or R&D .

Successful R&D projects lead to the discovery of new products, better products, or superior methods of production.

In the Solow growth model, we can think of these research successes as increases in the technology level, A.

Endogenous growth models: the growth rate of A is explained within the model.

Therefore, we can use endogenous growth models to understand how government policies and other variables influence R&D investment and, thereby, the rate of technological progress and the long-run growth rate of real GDP per person.

Back 15

Endogenous growth theory – Paul Romer

Front 16

If A represents an idea, all producers can use the idea simultaneously.

If producer 1 uses the idea to create goods and services, producer 2 can use the same idea at the same time to create other goods and services.

In a physical sense, an idea is a ___________ –any number of producers can use the idea simultaneously without reducing the amount of the idea available to others.

Examples of non-rival ideas are mathematical formulas in calculus, chemical formulas for drugs, codes for computer software….

Back 16

non-rival good