Facts About Growth Slide 1 Introduction and Motivation Elias Dinopoulos Schumpeterian Growth Theory.

Facts About GrowthFacts About Growth Slide Slide 11

Introduction and MotivationIntroduction and Motivation

Elias DinopoulosElias Dinopoulos

Schumpeterian Growth Schumpeterian Growth Theory Theory

Facts About GrowthFacts About Growth Slide Slide 22

Organization of the topicOrganization of the topic

Introduction and motivation

Data on growth and development

Stylized facts about growth

Facts About GrowthFacts About Growth Slide Slide 33

Why study economic growth?Why study economic growth?

Economic questions that are still debated: Why are some countries rich and other

countries poor? Why growth rates differ across countries? Are long-run growth rates exogenous or

endogenous?Two concepts of endogeneity:

Do firms optimize when they decide to invest in processes that generate growth?

Are long-run growth rates affected by policy parameters?

Facts About GrowthFacts About Growth Slide Slide 44

The development of growth theoryThe development of growth theory

Classical growth theory Adam Smith; Malthus; Ricardo; Marx.

The neoclassical growth theory The Solow model of economic growth.

Perfectly competitive marketsExogenous rate of population growthExogenous rate of technological progressEndogenous long-run income per capita levelsEndogenous transitional growth of per capita

output.

Facts About GrowthFacts About Growth Slide Slide 55

Preliminary definitions and conceptsPreliminary definitions and concepts

In a steady- state equilibriumsteady- state equilibrium each endogenous variable grows at a constant rate (which can be zero).

The growth rates of different variable can be different but each growth rate must be independent of time.

We can analyze a steady-state equilibrium easier than an equilibrium that depends on time explicitly.

We refer to a steady-state equilibrium as a long-run long-run or as a balancedbalanced growth equilibrium.

Facts About GrowthFacts About Growth Slide Slide 66

Schumpeterian growthSchumpeterian growth

Schumpeterian growthSchumpeterian growth is a particular type of growth that is based on the process of creative destruction (Joseph Schumpeter, Capitalism, Socialism and Democracy, 1942).

Creative destruction is a process that characterizes the continual introduction of new products or processes under conditions of temporary monopoly power. New and or better products (processes)

replace old ones; new firms replace old ones; this process creates technological progress that benefits society.

Facts About GrowthFacts About Growth Slide Slide 77

Schumpeterian growth theorySchumpeterian growth theory

The process of creative destruction generates technological progress and economic growth.

It is also based on temporary monopoly power and dynamic imperfect competition.

The presence of distortions and imperfect competition allows a strong role for government policy.

Facts About GrowthFacts About Growth Slide Slide 88

The development of new growth theoryThe development of new growth theory

In the mid 1980’s two broad classes of early early endogenous growth modelsendogenous growth models were developed: Paul Romer (1986, JPE) and Bob Lucas (1988)

introduced external economies to scale into the theory of growth.

Segerstrom, Anant and Dinopoulos (1990, AER), Paul Romer (1990, JPE), Aghion and Howitt (1992, Econometrica), and Grossman and Helpman (1991, ReStud) developed the Schumpeterian growth theory.

Early Schumpeterian growth models carried the scale effects property.

Facts About GrowthFacts About Growth Slide Slide 99

Schumpeterian growth theorySchumpeterian growth theory

Recent Schumpeterian growth models removed the scale effects property.

These models introduced population growth in earlier ones:

Schumpeterian growth models without scale effects can be classified into: Semi-Endogenous growth models

Jones (1995, JPE); Segerstom (AER, 1998), Kortum (1997, Econometrica)

Fully-Endogenous growth modelsYoung (1998, JPE), Howitt (1999, JPE), Dinopoulos

and Thompson (JOEG, 1998)

Facts About GrowthFacts About Growth Slide Slide 1010

Data on growth and developmentData on growth and development

Fact #1:Fact #1: There is enormous variation in per There is enormous variation in per capita income across economiescapita income across economies. The poorest countries have per capita

incomes that are less than 5 percent of per capita incomes in the richest countries.

See first section of table 1.1. (Jones, page 4), which reports real per capita GDP in 1990 of rich countries.

There are measurement issues associated with international comparisons.

GDP is an imperfect measure of development level but is correlated highly with other indicators of prosperity.

Facts About GrowthFacts About Growth Slide Slide 1111

Data on Growth and DevelopmentData on Growth and Development

Facts About GrowthFacts About Growth Slide Slide 1212

Data on growth and developnmentData on growth and developnment

Fact #2: Rates of economic growth vary Fact #2: Rates of economic growth vary substantially across countries.substantially across countries. The last two columns of table 1.1 characterize

economic growth. From 1960- 1990, growth in GDP per worker in the

U.S. averaged about 1.4 percent.Japan had a 5 percent average growth during the

same period, and China has experienced more than 10 per cent growth in the last decade.

The last column of table 1.1 show how long it could take for a country to double its per capita income, using the formula time=(70/percentage of growth).