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Macroeconomic Analysis 2003. Convergence or Conditional Convergence. Contents. Definition of Convergence and Divergence Evidence of divergence among UK regions Labour and capital mobility and convergence Steady State in Autarky and Globalisation Evidence for Conditional Convergence

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slide1

Macroeconomic Analysis 2003

Convergence

or

Conditional Convergence

Lecture 7

contents
Contents
  • Definition of Convergence and Divergence
  • Evidence of divergence among UK regions
  • Labour and capital mobility and convergence
  • Steady State in Autarky and Globalisation
  • Evidence for Conditional Convergence
  • Poverty Trap: why pigs cannot become elephants?
  • Does more trade lead to convergence?
  • Results of growth studies
  • Exercises

Lecture 7

meaning of convergence and divergence
Meaning of Convergence and Divergence

Poor country should grow

at faster rate then a rich

country

Experience of African

countries

Lecture 7

slide4

Two concepts of Economic Convergence

Mean Differerence

Dispersion Measure

Standard Deviation

Low income regions should

grow faster than high income

region

Lecture 7

slide5

Evidence for Lack of Sigma and Beta Convergence in the

Per capita Income among the UK Regions, 1993-1998

Lecture 7

marginal productivity of capital in rich and poor countries and capital accumulation in autarky
Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation in Autarky

MPKP

MPKR

rp

rR

KP

KR

Lecture 7

slide7

Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation After Globalisation

MPKP

MPKR

rP

rp

RG

rR

KP

KR

Lecture 7

slide8

Marginal productivity of Labour in Rich and Poor Countries Before and After Globalisation

MPLP

MPLR

wR

wR’

LP

LP’

LR

LR’

Lecture 7

who gain and who lose from globalisation
Who Gain and Who Lose From Globalisation?

Capitalists in rich countries and workers in poor countries gain.

rp

rR

MPKR

MPKP

wR

wp’

wR’

MPLR

MPLP’

wp

MPLR’

MPLP

Lecture 7

slide10

Savers

Households, Corporations and Government

Intermediaries

Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets

Investors

Small, Medium and Large

Private, Public, Domestic and Foreign

Lecture 7

slide12

Factors Promoting Convergence

  • Domestic factors
    • Saving
    • Investment
    • Population growth rate
    • Human capital
    • Technology
    • Development of infrastructure
    • Sound economic policy
    • Homogenous and stable society
    • Transparent rules and regulations
  • Global factors
    • Trade of goods and services
    • Inflow and outflow of capital
    • Emigration or immigration of skilled and unskilled labour
    • Adoption of better technology
    • Growth of the global economy
    • Peace/Oil prices

Lecture 7

slide15

Evidence for Beta-Convergence in Europe: Growth Rate of Per Capita Income and Its level in 1960

Lecture 7

slide17

Lack Evidence of Convergence among Middle and Low Income Countries:Average Annual Growth Rate of Per Capita Income (%) and Its level in 1960

Conditional Convergence

Lecture 7

slide20

Japan had lower income in the

beginning and had an astonishing

growth rate from 1960 to 1990

and it overtook

all OECD countries in per capita income

France, Germany UK and USA

show significant process of

convergence

Lecture 7

evidence for conditional convergence across all countries
Evidence for Conditional Convergence Across All Countries

Low income countries grow slower

than middle income countries, which

grow faster than high

income countries.

Conditional Convergence

Lecture 7

why the investment rate is not the same across all oecd countries feldstien horioka puzzle
Why the investment rate is not the same across all OECD Countries? Feldstien-Horioka Puzzle

Lecture 7

slide27

Poverty Trap

Lecture 7

increasing return poverty threshold and stability of the steady state
Increasing Return, Poverty Threshold and Stability of the Steady State

y=f(k)

y

I =(n+d)k

a

Points b and o

are unstable

steady states

sy

b

Big Push

o

k2

Poverty TH

k1

k0

Poor SS

Lecture 7

slide31

Critical Capital Stock for Control in Population Growth Rate

yH

b

a

yL

nH> nL

KH

PovTH

Kss

Low ss trap

Lecture 7

slide33

Policy Issues:Tax, Saving and Consumption

  • What is the impact in consumption and saving in the above model
    • If there is a 20 percent tax on interest income?
    • If there is a 20 percent subsidy in it?
    • What sort of tax system is better for increasing the ratio of saving? Does a higher rate of VAT promote saving or consumption?
    • Does a higher rate of tax on labour income encourage or discourage saving?
    • Does a higher rate of tax on pension income increase saving or consumption?

Lecture 7

exercises
Exercises
  • Calculate annual growth rates between 1960 and 2000 across G7 and for countries with growth miracles and growth disasters
  • Calculation of positive externality and economic growth (Spill-over Effects).
  • Closing the productivity gap
  • Conditional convergence

Lecture 7

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