Solow Wrap UpModern Growth TheorySolow Wrap UpModern Growth TheoryModern Growth TheoryElias YannopoulosSeptember 21, 2012Elias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheoryProblems With SolowCorrelation does not prove causationXKCD ComicEx: Going to sleep with your shoes on and waking up with aheadacheEx: The sale of ice cream and the amount of drowningsTechnological changes are not exogenous, they are the resultof research and developmentWe do not see as much convergence as is expected, the richget richer and the poor stay poorLack of factor mobilityEffective labor - labor adjusted for education and experienceThe Take AwayTechnology and Capital matter for economic growth but theyare not allElias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheoryInstitutionsInstitution - an organization, establishment, foundation,society; a well established and structured pattern of behaviorEconomic Institution - laws, common practices, andorganizations in a society that affect the economyFor this section the focus is on economic institutions thatfoster/hinder growthPrivate property rightsThe corporation, limited liabilityGovernment control of businessesCorruptionInstitutions define acceptable behavior and affect economicincentivesElias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheoryEndogenous GrowthEndogenous - caused by factors within the organism orsystemEndogenous growth is the idea that growth comes from theactions of agents within the economyContrast with exogenous growth as coming from outside theeconomyReasons why moder theory has shifted to endogenous growthNew technology comes from the actions of agents who investin research and developmentEntrepreneurship - the combination of ability to embracecreativity and vision, and a willingness to accept riskEntrepreneurship is about people getting things done andturning ideas into realityEconomic institutions that foster growthElias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheorySources of Economic GrowthThree sources of economic growthResources - this includes natural resources, human andphysical capital, and the workforceHuman capital - the skills that are embodied in workersthrough experience, education, and on-the-job training(knowledge)Technology - the ability to produce things better and also toproduce new goodsInstitutions - the adherence to institutions that foster growthand the movement away from those that hinder itThe textbook has 5 sources of growth, I simply include capitalin resources and entrepreneurship in institutionsAn economy needs all of these are willing to grow, as welearned from Solow just one or two is not enoughElias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheoryThe Path to GrowthAgents inside of the economy have to have the rightincentives for there to be endogenous growthWhat incentives affect endogenous growth?Voluntary investment involves sacrifice and patience, giving upconsumption to day for consumption in the futurePeople will invest naturally when the expected returns of theirinvestment exceed what they have to give up todayInstitutions can have large impacts on the cost and benefits ofinvestment and this whether growth occurs and in whichsectorsIncentives make up the final piece in the path to growthGrowth-friendly institutions ⇒ Growth-friendly incentives ⇒investment and innovation ⇒ GrowthElias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheoryMore InstitutionsInstitutions that foster growthPolitical Stability and Rule of LawPrivate property rights, and patent lawsStable money and pricesTaxes high enough for effective governmentTaxes low enough for profitable productionFlow of capital and technology across bordersCompetitive MarketsElias Yannopoulos Modern Growth TheorySolow Wrap UpModern Growth TheoryFinal PointsThe main addition of Modern growth theory is the focus oninstitutions that foster growthThese institutions are about maintaining stability and allowingprice incentives to steer growth to where it is most valuableEndogenous growth instead of exogenous growthWe know the sources of economic growth, but it is stillbeyond economists to pinpoint how everything fits together tolead to growthElias Yannopoulos Modern Growth
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