Economic History

Episode 1: Economic Growth

Prof. Montserrat Cachero
Office 3.2.28
Email: mcacvin@upo.es
Some crucial concepts
• Economic Growth: Increment on per capita GDP
• Differences between economic growth and
development: Social aspects such as health or
education
Measuring economic growth
• Per capita GDP (Gross Domestic Product), per
capita INCOME
• Problems of GDP: does not take into account
inequality, does not include unemployment or
informal economy (black markets)
• Other proxies: Population, Purchaising Power
parity (PPP)
Lessons from History
Measuring development
• A complex concept which includes education,
health,… Social welfare and quality of life
• http://data.worldbank.org/indicator
• http://stats.oecd.org/index.aspx
• http://data.un.org/
• http://epp.eurostat.ec.europa.eu/portal/page/p
ortal/eurostat/home
• http://www.imf.org/external/spanish/index.ht
m
The Human Development Index

• Components: Per capita GDP, life expectancy

and education level (Rate which includes
primary education, high school, college and
adults’ literacy)
In the long run
• Convergence or divergence?
• Convergence Hypothesis: Negative correlation
between per capita GDP and average GDP
growth
• Poor countries + Technological efficiency=
Catch-up
Lessons from History: Not always catch up
effect
• Convergence theory in economics actually
works in real life but it is not for all poor
countries. Only countries with favorable
growth conditions like government policies,
availability of resources, capital availability
etc. can show this effect. Countries like
Singapore, Taiwan or Hong Kong
• For convergence theory to work, a set of
conditions need to be fulfilled. According to
Abramovitz: REQUIREMENTS: ability to absorb
new technology, attract capital and participate in
global markets
The clubs
Reasons for Economic Growth
• Economic Model
• Objections from the real world
• The role played by institutions
Sources of growth
(Neoclassical Model)

• The production function: Y=f(Xi)

Xi=Land, Labour, Capital
• Quantity or Quality?
• The Law of Diminishing Returns and
Productivity
Law of Diminishing Returns
“If one factor of
production is
increased while
other are held constan
t,
the output per unit of
the variable factor will
eventually diminish”
And what about productivity?

• OUTPUT/INPUT
Objections to Neoclassical Theory
• The Solow Model: Importance of capital flows
(foreign investments and savings) and
International Trade
• The endogenous Growth: Human capital,
Institutions (the role of the state) and
Technology-----Affect to productivity growth
• Nowadays: The importance of Geography
(agriculture and productivity, resources,
communications, market integration)
Economic Institutions
“Commerce and manufactures can seldom flourish
long in any state which does not enjoy a regular
administration of justice, in which the people do not
feel themselves secure in the possession of their
property, in which the faith of contracts is not
supported by law, and in which the authority of the
state is not supposed to be regularly employed in
enforcing the payment of debts from all those who
are able to pay. Commerce and manufactures, in
short, can seldom flourish in any state in which
there is not a certain degree of confidence in the
justice of government”
Adam Smith
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Short questions
• Differences between economic growth and
development
• How can we measure economic growth?
• Define convergence hypothesis
Long questions
• Variables explaining economic growth
• Economic growth and history, what was the role
played by industrialization?