1. Income Disparity Among Countries and Endogenous Growth
Chapter 7
Income Disparity Among Countries and Endogenous Growth

2. Convergence of Growth Experiences
Prediction of the Solow model: Given the same n,s, and z, y converges among countries
It is not entirely consistent with the data
Question: Why?
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3. Maybe z is different across countries.
Maybe different countries can have different growth rate, i.e., the growth rate can be endogenously determined.
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4. Convergence: Theory and Evidence
Unconditional convergence in Solow model.
Data show convergence only in rich countries.
Suppose that the countries do not have access to the same technology. There exists significant barriers to the adoption of new technology.
Labor Unions
Trade restrictions
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5. Differences in z imply differences in y Policy Implications
The barriers to the adoption of new technology differ across countries imply differences in z across countries
Differences in z imply differences in y
Policy Implications
Promote greater competition
Promote free trade
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6. Figure 7.1 Rich and Poor Countries and the Steady State
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7. Figure 7.2 Convergence in Income per Worker Across Countries in the Solow Growth Model
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8. Figure 7.3 Convergence in Aggregate Output Across Countries in the Solow Growth Model
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9. Figure 7.4 Differences in Total Factor Productivity Can Explain Disparity in Income per Worker Across Countries
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10. An Alternative: Endogenous Growth with Human Capital Accumulation
Solow model is an exogenous growth model. It does not explain the growth itself!
We need an endogenous growth model.
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11. Why we cannot generate the unbounded growth in Solow model?
The key is diminishing marginal return to capital stock (from concavity of production function)
To have an unbounded growth, we need to break this trap.
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12. Human Capital: stock of skills and education embodied in people.
The acquisition of human capital is nonrivalrous. It has positive externality.
It does not have the diminishing return.
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13. The Representative Consumer
The economy only has one representative consumer (per capita=aggregate) who does not value leisure
Assume he cannot save
C=wuHs
u is the fraction of time devoted to working, Hs is the current stock of human capital
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14. The accumulation of human capital
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15. The Representative Firm
Production function
Firm’s problem
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16. Figure 7.5 Determination of the Equilibrium Real Wage in the Endogenous Growth Model
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17. Competitive Equilibrium
The equilibrium wage is w=z.
Labor market clears
We have
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18. The growth rate of human capital is
It’s easy to show same holds true for C and Y.
This model economy does not grow because of any exogenous forces. n=0, b and z are fixed.
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19. Figure 7.6 Human Capital Accumulation in the Endogenous Growth Model
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20. Economic Policy and Growth
Change u through taxes or subsidies to education.
The welfare effect depends on the trade-off b\w current consumption and future consumption.
Government could also increase b by education policy
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21. Figure 7.7 Effect of a Decrease in u on the Consumption Path in the Endogenous Growth Model
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22. Convergence in Endogenous Growth Model
Convergence does not occur even if countries are identical in all respects except that there are differences in the initial level of human capital.
Higher (1-u) means higher growth rate, hence implies higher y over time.
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23. Figure 7.8 No Convergence in the Endogenous Growth Model
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24. Figure 7.9 Growth and Education
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25. Figure 7.10 Income per Worker and Education
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27. Class Discussion
How should China do to improve long-run economic growth rate?
How would China grow after the deplatation of “population dividend”?
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