Ec3040 economics of ldcs module b
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EC3040 Economics of LDCs Module B. Professor Patrick Honohan. http://www.tcd.ie/Economics/staff/phonohan. EC3040 Economics of Less-developed Countries Module B January-May 2009 Professor Patrick Honohan Room C6.009, Institute for International Integration Studies,

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EC3040 Economics of LDCs Module B

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Ec3040 economics of ldcs module b

EC3040 Economics of LDCsModule B

Professor Patrick Honohan

http://www.tcd.ie/Economics/staff/phonohan


Ec3040 economics of ldcs module b

EC3040 Economics of Less-developed Countries

Module B January-May 2009

Professor Patrick Honohan

Room C6.009, Institute for International Integration Studies,

6th Floor, Arts Building, Trinity College, Dublin

Office hour: Monday 3-4pm or email me at [email protected]

Outline

This module begins (in January 2009) with a look at some of the economic models that have been used to analyze cross-country differences in overall economic growth. We then focus on international and financial dimensions to development, including the problem of LDC debt. The final topic covers aid, government and institutions.

Sources

Text:

Todaro, Michael P. and Stephen C. Smith. 2008. Economic Development 10th Edition (Addison-Wesley) (Earlier editions will do)

The aim is to cover Chapters 3-4 and 11-17 of the core text (Todaro and Smith) in this module.


Ec3040 economics of ldcs module b

There will not be sufficient time to discuss all the material in the lectures so students should ensure they read these chapters.

Additional background reading will be listed in a note on tutorial topics and some other items will be mentioned in the lecture notes to be posted below.

Topics

1.   Theories of growth: old and new

Slides will be available here

2.   International trade: Engine of growth or obstacle to development

Slides will be available here

3.   Finance: “neither a borrower nor a lender be”?

Slides will be available here

4.   Aid, government and institutions

Slides will be available here


Ec3040 economics of ldcs module b topic 1

EC3040 Economics of LDCsModule B Topic 1

Theories of Economic Growth

(Drawn mainly from Todaro-Smith Ch 3 & 4)


Ec3040 economics of ldcs module b

…we start with an animation from www.gapminder.org


Ec3040 economics of ldcs module b

2006

Deaton, JEP 2008


Ec3040 economics of ldcs module b

Deaton, JEP 2008


Ec3040 economics of ldcs module b

Average growth rates 1960-2000

Source for these blue figures: Weil (2007)


What causes economic growth the role of capital

What causes economic growth? The role of capital

  • Rostow’s “Stages of growth”

    • Emphasized mobilization of savings

  • The Harrod-Domar growth model

    • Saving→ increasing stock of capital → growth of output

  • Solow’s model

    • Recognizes diminishing returns

    • Reaches dramatically different conclusions!


The harrod domar model

The Harrod-Domar Model

(3.1)

(3.2)

(3.3)

(3.4)


The harrod domar model 2

The Harrod-Domar Model (2)

(3.5)

(3.6)

(3.7)


The harrod domar model 21

The Harrod-Domar Model (2)

(3.5)

(3.6)

(3.7)


Ec3040 economics of ldcs module b

Interlude – how good is all this data?


The solow model

The Solow Model

(3.1)

(3.2)

Depreciation*

(3.3)

With diminishing returns

(3.4)

*Adding this alone to Harrod-Domar just changes s to s-δk in 3.7


The solow model 2

The Solow Model (2)

Diminishing returns implies increasing “incremental capital output ratio”


The solow model 3

The Solow Model (3)

Eventually capital (and output) grow to the point where saving is only sufficient to pay for depreciation


Ec3040 economics of ldcs module b

Long-term equilibrium in simplest Solow model

Y

sY

δK

K


Ec3040 economics of ldcs module b

Long-term equilibrium in simplest Solow model

Y

sY

δK

K


Ec3040 economics of ldcs module b

Long-term equilibrium in simplest Solow model

Y

sY

δK

K

Stationary point


Ec3040 economics of ldcs module b

Long-term equilibrium in simplest Solow model

Y

sY

δK

K

Stationary points


Ec3040 economics of ldcs module b

Long-term equilibrium in simplest Solow model

Y

high saving

sY

low saving

δK

K

Stationary points


Harrod domar and solow model predictions

Harrod-Domar and Solow model predictions

  • Harrod-Domar says growth is proportional to savings rate …and inversely to capital-output ratio

  • Although Solow agrees that (at the same level of income per head) a country with higher savings will grow faster…

  • Solow also says growth eventually stops despite savings (unless population or technology changes)

  • But eventual income per worker will depend on savings


Role of population growth in solow model

Role of population growth in Solow model

  • Reduces the effect of diminishing returns to capital

  • So boosts long-term growth of output

  • But still no long-term growth in per capita output

  • (See figures in Appendix to Chapter 3)


Role of population growth in solow model 2

Role of population growth in Solow model (2)

  • Focus shifts from output Y and capital K to

    output/labour ratio Y/L written y and capital/labour ratio K/L, written k.

    Warning: this is not the same k as in the Harrod-Domar model!

  • If population is growing at the rate n, then


Quantifying the solow model

Quantifying the Solow model

Let’s be specific about the function f(y) in y=f(k)

Log-linear function has the kind of shape we want:

Which is the same as

Also called: “Cobb-Douglas” production function


Ec3040 economics of ldcs module b

Weil (2007). Uses Solow model Cobb-Douglas production function with capital share of 1/3


Ec3040 economics of ldcs module b

Weil (2007). Uses Solow model Cobb-Douglas production function with capital share of 1/3


Quantifying the solow model 2

Quantifying the Solow model (2)

Solow made the most of this gap:

Her argued that the missing element must be improvements in technology.

These got called the “Solow residual” – and represented most of growth for advanced economies

But where does the technology come from?


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