GROWTH POLICY

Daniel Alexander / 130419002

Shiefanny Delicia / 130419004
Yeremia Habakuk / 130419005
  Endogenous growth theory emphasizes different
growth opportunities in physical capital and knowledge
capital.
 The idea that increased investment in knowledge
increases growth is a key to linking higher saving rates
to higher equilibrium growth rates.

Growth Theory:
Endogenous Growth
The Mechanics of
Endogenous Growth
 Because of the diminishing marginal
product of capital, the production
function and the parallel saving curve
eventually flatten out.
 Since the investment requirement line
has a constant positive slope, this line
and saving curve are guaranteed to
cross.
 Contrast figure b, where we have changed the assumed shape
of the production function to show a constant marginal
product of capital.
 Since the saving curve no longer flattens out, saving is
everywhere greater than required investment.
 The higher the saving rate, the bigger gap of saving above
required investment and the faster is growth.
The Deeper Economics of
Endogenous Growth
 Endogenous growth theory hinges on the notion
that there are substantial external returns to
capital.
 Consider the role of human capital, particularly
investment knowledge.
 Since the contribution of new knowledge is only
partially captured by the creator, there can be
substantial external benefits
 Thus, economist think that investment in human
capital in general and research and development
specifically is the key to understanding long-run
growth.
 Convergence
 The idea of convergence in economics is the hypothesis
that poorer economies' per capita incomes will tend to
grow at faster rates than richer economies. As a result,
all economies should eventually converge in terms of per
capita income.
 Contrast conditional convergence with the prediction of
endogenous growth theory that a high saving rate leads to
a high growth rate.
 Countries with higher investment will end in steady state
with higher per capita income but not with a higher growth
rate.
The Solow growth model

Population growth Steady-state income

INCOME
• Their growth is mostly explained by the increase of input
and not by the higher of productivity.
• Labor force and secondary education are also increasing very
high in the table.
• Asian tigers come from zero to hero that make these
country can reach into this level.
 THE CHINESE
GROWTH MIRACLE
China has maintained a per capita income growth rate over 7% for
more than 3 decades. China has changed from a country in which
people often didn’t have enough to eat to a middle-income country
and because, China is a large place so it has often been the engine
pulling up world aggregate demand. China has very high rate of
saving, investment and a low rate population growth. China has
become very export oriented.
The Truly Poor
Countries
 -On 1967 both countries were very poor
- But then, both countries can survive, even China grew rapidly at
that time
- The factors of growth in output per worker and sources of
growth in output per worker, such as physical capita, education
and total factor productivity

History Speaks : India

and China
Natural Resources :
Limits to Growth?
 The economy is protected from
resource-depletion disasters by 2
factors:
 Technical progress permits us to produce
more using fewer resources.
 As specific resources come into short supply,
their prices rise, leading producers to shift
toward substitutes
 Social Infrastructure
and Output
Not all the countries in the world have the same
amount of capital.
WHY?
Saving and Investing

But why do some countries save and

invest more?
The social infrastucture that different each
other (A good legal system, stable taxes, limits on
government bureaucracy)
  Some of the early enthusiasm for the new growth theory
has faded
 Hardly credible that the long-run growth rate is unrelated to
the saving rate.
 At the same time,, untangling how they are related has
turned out to be harder than economists once thought, as
has the relation between institutions and growth

Growth Theory : New Versus Old

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