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Development
Anjan Chakrabarti
The framework:
(i) Observation or facts are prior.
(ii) Theory is the explanation of these facts.
Questions:
(i) How rich are the rich countries, how poor are the
poor?
(ii) How fast do rich and poor countries grow?
The Facts of
Economic Growth
Fact 1: There is enormous variation in per capita
across economies,. The poorest countries have per
capita incomes that are less than 5 percent of per
capita incomes in the richest countries.
K = Capital
L = Labor
A = Knowledge or effectiveness of labor
production function
Output per unit of effective labor is a
Inada conditions
Evolution of Input into
Production
dL(t) Ln L(t) L n
dt L
dA(t)AgA(t) A g
dt A
k(t)sY (t)K (t)
n 0, g 0, 0.
The Solow Economy
Y (t) = F (K(t), A (t) L (t)).(1)
A g A(t) , g 0...(5)
k(t)sY (t)K (t), 0...(6)
Dynamics of the model
S = sY = K K
k(t) s f k (t ))(n g )k (t)
K* at which:
k(t)0 or sf (k ) (n g )k
This k* where k(t)0 signifies the
C (1 s)Y
c f (k ) s f k
dc f / (k *(s, n, g, ) (n g ) dk *(s, n, g, )
ds ds
dc 0 if f / (k ) n g
ds
Interpretation
(i) f / (k ) n g
When k rises, there is more than enough
additional output per unit of effective labor to
maintain the higher level of capital stock and
so consumption rises.
(ii) f / (k ) n g
Four variables: L, K, A, Y.
Model set in continuous time.
Two Sectors:
1) Goods producing sector where output is
produced.
2) R&D sector where stock of knowledge is
made.
Central Questions of Growth Theory
Two central questions:
(i) The growth over time in standard of
living.
(ii) The disparities across the different parts
of the world.
R&D Model is good at answering the first
questiongrowth of knowledge is indeed
a central reason for expansion of output
and standard of living.
Testing of Worldwide Economic
Growth
Michael Kremer: Takes off from the
explanation of the endogenous growth
theories that technological models of
economic growth is an increasing function
of population size.
Extending back to 1 billion BC he shows that
abstract knowledge:
human capital is rival and excludable.
Proposition: Moderate changes in the
resources devoted to physical and human
capital accumulation may lead to large
changes in output per workers. Accounts for
large differences in income.
Two Effects of Human
Capital
1. Including acquired skills and abilities must
raise the estimate of the share of income
that is paid to capital of all kinds. We have
seen it has a positive impact.
2. Devoting more resources to accumulation
of human capital (alongside physical
capital) increases the amount of output
that can be produced in the future.