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PSME M1 Economic Growth Tutorial.  Introduction ◦ Review of Classic Solow Model ◦ Shortfalls of Solow ◦ Human Capital Accumulation ◦ Convergence Theory.

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Presentation on theme: "PSME M1 Economic Growth Tutorial.  Introduction ◦ Review of Classic Solow Model ◦ Shortfalls of Solow ◦ Human Capital Accumulation ◦ Convergence Theory."— Presentation transcript:

1 PSME M1 Economic Growth Tutorial

2  Introduction ◦ Review of Classic Solow Model ◦ Shortfalls of Solow ◦ Human Capital Accumulation ◦ Convergence Theory and Model Prediction  Theoretical Solow Model ◦ Estimation results of Classic Solow Model and Analysis ◦ Augmented Solow Model and its Predictions ◦ Estimation results of Augmented Solow Model and Analysis  Endogenous Growth and Convergence

3  Paper by Mankiw, Romer and Weil  Published in The Quarterly Journal of Economics, Vol 107, No. 2, 1992, pg  Paper examines whether the Solow growth model is consistent with international variation in the standard of living

4  Paper aims to fill up some shortfallings of the Solow model  Solow model is augmented with human capital as well as physical capital accumulation  An augmented Solow model is a better representation of cross-country data  Prediction of the model is that by holding the population growth and capital accumulation constant, countries converge in terms of standards of living at a given Solow convergence rate

5  Standard neoclassical production function with decreasing returns to capital (and labor)  Treat savings and population rate as exo (s and n are given)  s and n determine the steady-state level of income per capita [(f(k*)] ={(n+δ)/s} k*)  If s is higher, then f(k*) is larger -> the higher the saving rate, the richer the country  If n is higher, then f(k*) is smaller –> the higher the pop rate, the poorer the country

6  Using cross-country data, paper finds that s and n affect income in the directions predicted by Solow  Problem is that the magnitudes are not coherant  Might be omitted variables so need to include human capital accumulation

7  For any given rate of human capital accumulation, higher s or lower n leads to higher f(k*) and thus a higher level of H*  Human capital accumulation may be correlated with s and n, leading to omitted variable bias  According to paper, the augmented Solow model provides an almost complete explanantion (80% of country income variation is explained) of why some countries are rich and others are poor

8  The article argues that there is no absolute convergence (countries need not converge in per capita income)  Rather, there is conditional convergence (countries generally converge to their respectively different steady state incomes)  Finally, the model predicts that poor countries tend to have higher rates of return to physical and human capital

9  Given exo s, n and g (rate of tech progress) and a Cobb-Douglas production function  Solow predicts α=1/3

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11  3 aspects of model is supported  (1) Coefficients of s and n have predicted signs and are highly sig  (2) Restriction on coefficients of s and (n+g+δ) is not rej  (3) Differences in s and n account for a large fraction of cross-country variation (R^2=0.59)  Problem with α (≠ 1/3 as predicted)

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13  Human capital accumulation increases the impact of physical capital on income  High population growth lowers income per capital because the amounts of both physical and human capital must be spread more thinly over the population  Use percentage of working-age pop that is in secondary school as a proxy for human capital accumulation

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15  Human capital is significant is all three samples  Size of coefficient on physical capital accumulation is reduced  Fit of regression is improved  The paper concludes that adding human capital to the Solow model improves its performance

16  Endogenous growth models are characterized by non-decreasing returns to inputs  Implies that countries that save more grow faster indefinitely and countries need not converge in income per capital even if they have the same preferences and technology  The Solow model predicts that countries reach different steady states (conditional convergence at the rate the model predicts)

17  The paper argues that the Solow model is consistent with the international evidence when augmented with human and physical capital  The augmented Solow model says that differences in saving, education and population growth should explain cross-country differences in income per capita  Direct further research on exo variables that vary across countries eg diff in tax policies, education policies, etc


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