Economics 121: The Macroeconomics of Development Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA , U.S.A. Spring WebPages:

Review Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA , U.S.A. Spring WebPages:

Lawrence J. Lau, Stanford University3 The Historical Experience of Economic Development u The characteristics of economic development u Demographic transition u Decline in mortality and morbidity u Rise in life expectancy u Decline in the fertility and birth rates u Sustained growth in real output per capita u Industrialization u Urbanization u Sustained rise in literacy and educational achievement u Sustained improvements in life expectancy and other health status indicators u An equitable distribution of income

Lawrence J. Lau, Stanford University4 The Sources of Economic Growth u Measured Inputs u Tangible Capital u Labor u Human Capital u R&D Capital u Technical Progress u Intangible Capital (Human Capital, R&D Capital, Goodwill (Advertising and Market Development), Information System, Software, etc.) u Other Omitted and Unmeasured Inputs (Land, Natural Resources, Water Resources, Environment, etc.) u Improvements in Technical and Allocative Efficiency u The traditional growth-accounting formula u The sources of economic growth in developed and developing countries

Lawrence J. Lau, Stanford University5 Cross-Country Growth Regressions u Concepts of convergence u Absolute convergence of real GDP per capita u Conditional convergence of real GDP per capita u Convergence in technology

Lawrence J. Lau, Stanford University6 Models of Economic Development u Two-Gap Models u Savings gap u Foreign exchange gap u Two-Sector Models u Dual Economy Models with and without Surplus Labor u Characteristics of the Lewis Model u Zero marginal productivity of labor in the agricultural sector--agricultural output is fixed u Constant real subsistence wage rate in agriculture--institutionally determined u Landlords and capitalists save; laborers consume u Marginal productivity of labor higher in the industrial sector than in the agricultural sector u Migration of labor from the agricultural sector to the industrial sector raises aggregate real output of the entire economy

Lawrence J. Lau, Stanford University7 Savings and Capital Accumulation u The relationship among savings rate, capital accumulation, and the level and rate of growth of real GDP per capita u Determinants of savings u Savings and investment

Lawrence J. Lau, Stanford University8 The Role of Money and Finance u The “Quantity Theory of Money”: MV=PT or V=PT/M u V rises with technical progress in the transactions technology u V as defined cannot be measured because T is not directly observed; instead, one can define an alternative velocity variable V*=PY/M in terms of observable variables--V*= PT/M x Y/T = V x Y/T = V/  u The variable  =T/Y, the ratio of the total real volume of all transactions T to Y is non-constant but changes over time u The volume of transactions relative to real GDP (T/Y) tends to rise in the process of economic development u T/Y also rises with financial deepening u T/Y rises with rising volume of trade with the same trade surplus/deficit u Inflation and money supply u The role of financial intermediation u Evolution of long-term capital markets

Lawrence J. Lau, Stanford University9 Stabilization in Closed and Open Economies u Insufficient aggregate demand u Excess aggregate demand u Inflation and taxation u Current and capital account balance u Exchange rate policy u The causes of the East Asian currency crisis u Lessons from the East Asian currency crisis

Lawrence J. Lau, Stanford University10 Development Policies and Strategies u Big Push versus Balanced Growth u Export Promotion versus Import Substitution u The infant industry argument u Central Planning versus Market u The role of foreign capital

Lawrence J. Lau, Stanford University11 Human Capital, Intangible Capital, and Infrastructural Capital u The distinction between social and private rates of return u Appropriability u Network externalities u Justification for public investments and/or subsidies

Lawrence J. Lau, Stanford University12 Endogenous Economic Growth u Technical progress as the outcome of purposive activity u Motivation is the possibility of monopoly profit u Technological increasing returns to scale and market increasing returns to scale u Increasing or constant returns to knowledge capital at the microeconomic level is neither necessary nor sufficient for increasing returns to scale at the macroeconomic level in knowledge capital, tangible capital and labor