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

Facts About Growth Slide 2 Organization of the topic Introduction and motivation Data on growth and development Stylized facts about growth

Facts About Growth Slide 3 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 Growth Slide 4 The development of growth theory Classical growth theory  Adam Smith; Malthus; Ricardo; Marx. The neoclassical growth theory  The Solow model of economic growth. Perfectly competitive markets Exogenous rate of population growth Exogenous rate of technological progress Endogenous long-run income per capita levels Endogenous transitional growth of per capita output.

Facts About Growth Slide 5 Preliminary definitions and concepts steady- state equilibrium In a steady- 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. long-run balanced We refer to a steady-state equilibrium as a long-run or as a balanced growth equilibrium.

Facts About Growth Slide 6 Schumpeterian growth Schumpeterian growth Schumpeterian 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 Growth Slide 7 Schumpeterian 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 Growth Slide 8 The development of new growth theory early endogenous growth models In the mid 1980’s two broad classes of early endogenous 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 Growth Slide 9 Schumpeterian 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 models Young (1998, JPE), Howitt (1999, JPE), Dinopoulos and Thompson (JOEG, 1998)

Facts About Growth Slide 10 Data on growth and development Fact #1:There is enormous variation in per capita income across economies Fact #1: There is enormous variation in per capita 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 Growth Slide 11 Data on Growth and Development

Facts About Growth Slide 12 Data on growth and developnment Fact #2: Rates of economic growth vary substantially across countries. Fact #2: Rates of economic growth vary substantially across countries.  The last two columns of table 1.1 characterize economic growth. From , 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).