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Lecture 71 Macroeconomic Analysis 2003 Convergence or Conditional Convergence.

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Presentation on theme: "Lecture 71 Macroeconomic Analysis 2003 Convergence or Conditional Convergence."— Presentation transcript:

1 Lecture 71 Macroeconomic Analysis 2003 Convergence or Conditional Convergence

2 Lecture 72 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

3 Lecture 73 Meaning of Convergence and Divergence Poor country should grow at faster rate then a rich country Experience of African countries

4 Lecture 74 Two concepts of Economic Convergence Standard Deviation Dispersion Measure Low income regions should grow faster than high income region Mean Differerence

5 Lecture Ann. Growth rate % United Kingdom9,67110,17010,61911,18511,87112, England9,85210,34910,77111,38412,14112, East Riding and North Lincolnshire 9,2899,68010,13010,92011,49011, Kingston Upon Hull, City of9,3199,78710,32510,88611,53811, East Riding of Yorkshire8,2688,4878,7419,7999,99610, North and North East Lincolnshire 10,23610,74111,32512,05912,93913, London14,11014,79815,25115,88517,15818, Scotland9,61410,16810,81811,16211,42912, Northern Ireland 5 7,6108,1148,6548,9649,5079, Wales7,9788,3938,9009,2409,56210, Sigma Convergence Standard Deviation 1,8061,8941,9051,9342,2102,537 Evidence for Lack of Sigma and Beta Convergence in the Per capita Income among the UK Regions,

6 Lecture 76 MPK R MPK P rprp rRrR KRKR KPKP Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation in Autarky

7 Lecture 77 MPK R MPK P rprp rRrR KRKR KPKP RGRG Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation After Globalisation rPrP

8 Lecture 78 MPL R MPL P wRwR LRLR LPLP Marginal productivity of Labour in Rich and Poor Countries Before and After Globalisation wRwR LPLP LRLR

9 Lecture 79 Who Gain and Who Lose From Globalisation? MPL R MPL P wpwp wpwp wRwR wRwR MPK R MPK P rprp rRrR Capitalists in rich countries and workers in poor countries gain.

10 Lecture 710 Savers Households, Corporations and Government Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Investors Small, Medium and Large Private, Public, Domestic and Foreign Investors Small, Medium and Large Private, Public, Domestic and Foreign

11 Lecture 711 Factor Mobility and Convergence

12 Lecture 712 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

13 Lecture 713 Autarky and Saving and Capital (Gartner (2003:262) has similar example)

14 Lecture 714 Impacts of Globalisation in Output and Income What is the capital stock in the steady state in A and B if there is a free mobility of capital?

15 Lecture 715 Evidence for Beta-Convergence in Europe: Growth Rate of Per Capita Income and Its level in 1960

16 Lecture 716

17 Lecture 717 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

18 Lecture 718 Results from Cross Country Growth Studies -1

19 Lecture 719 Results from Cross Country Growth Studies -2

20 Lecture 720 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

21 Lecture 721 Disparity in GNP Per Capita at Purchasing Power Parity,2001 (US $): A Lot of Divergence

22 Lecture 722 Output gap% =100*[(Trend GDP-Actual GDP)/Actual GDP]

23 Lecture 723 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

24 Lecture 724 Why the investment rate is not the same across all OECD Countries? Feldstien-Horioka Puzzle

25 Lecture 725

26 Lecture 726 Conditional convergence

27 Lecture 727 Poverty Trap

28 Lecture 728 Is this caused by the barriers to adopt a good technology? Or by Lauddites?

29 Lecture 729 Can a Penguin become a Cat or a Pig become an Elephant?

30 Lecture 730 y k1 k0 Poor SS k2 Poverty TH Increasing Return, Poverty Threshold and Stability of the Steady State y=f(k) I =(n+d)k sy a b o Big Push Points b and o are unstable steady states

31 Lecture 731 Critical Capital Stock for Control in Population Growth Rate Kss KHKH yHyH yLyL a b n H > n L PovTH Low ss trap

32 Lecture 732 Economic Growth Policies

33 Lecture 733 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?

34 Lecture 734 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


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