Questions and Answers
What does the Neoclassical growth model predict about the long-term behavior of economies?
In the Neoclassical model, what is the effect when capital grows faster than labor?
Which factor was found to be the most important for growth in developing countries according to studies using the production function approach?
What is the implication of the assumption of diminishing returns to capital in the Neoclassical model?
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What does the term 'technical progress' refer to in the context of growth?
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How does the Neoclassical model suggest labor and capital inputs affect economic growth?
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What criticism does the Neoclassical model have towards the Harrod model?
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Why is the production function considered versatile in growth analysis?
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What is most strongly associated with sustained growth in successful countries?
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Which growth model emphasizes long-run equilibrium growth?
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What major factor is considered an exogenous element in the neoclassical production function?
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What does the term 'growth diagnostics' refer to?
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What characterizes successful developing economies according to growth theories?
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Which classical economist is known for optimism regarding growth?
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What aspect of growth does 'new' (endogenous) growth theory specifically address?
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What does empirical studies using production functions primarily demonstrate about developed countries?
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What phenomenon is associated with non-diminishing returns to capital?
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What limitation is identified in ‘New’ growth theory regarding individual countries?
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What is necessary to identify constraints on economic growth according to the content?
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What does endogenous technical progress relate to in growth theory?
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Which of the following is NOT mentioned as an aspect of growth diagnostics?
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What does new (endogenous) growth theory challenge?
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Which factor is considered key in the new (endogenous) growth theory?
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What is conditional convergence in the context of growth theory?
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What is the primary goal of growth diagnostics?
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What could be a reason for low investment according to growth diagnostics?
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What misconception exists regarding the experience of individual countries based on macrodeterminants of growth?
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Which assumption does the new growth theory contradict regarding rich and poor countries?
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What is a likely consequence if the education levels are not the same across countries according to the discussed growth theories?
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What does the classical growth theory emphasize as a key factor for economic growth?
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According to the Harrod-Domar growth model, what happens when the actual growth rate does not equal the warranted equilibrium growth rate?
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What is the natural growth rate determined by in the Harrod-Domar growth model?
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Which classical economist predicted the breakdown of capitalism due to a falling rate of profit?
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What occurs if the warranted equilibrium growth rate is greater than the natural growth rate according to the Harrod-Domar growth model?
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What did Adam Smith view as a limitation to the division of labour?
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Which of the following describes the Harrod-Domar model's perspective on capital accumulation in developing countries?
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What did Malthus and Ricardo's views on agricultural returns lead them to predict?
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Study Notes
Classical Growth Theory
- Key classical economists include Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mill, and Karl Marx.
- Adam Smith highlighted growth potential through the division of labor and specialization, constrained by market size.
- Ricardo, Malthus, and Mill expressed concerns about diminishing agricultural returns leading to famine and declining profits.
- Marx theorized capitalism's collapse due to falling profit rates, worker immiseration, and realization crises.
Harrod-Domar Growth Model
- Developed by Roy Harrod (1939) and independently by Domar (1946).
- Introduces three growth rates: actual (g), warranted equilibrium (gw), and natural (gn).
- Equilibrium occurs when g equals gw, which is rare.
- If gw is greater than gn, secular stagnation results; if gn exceeds gw, structural unemployment and inflation emerge.
- Many developing countries experience faster growth in labor and technology than in capital, leading to structural unemployment.
Neoclassical Growth Model
- Proposed by Solow (1956) and Swan (1956) as a counter to Harrod's pessimism.
- Suggests economies converge to a natural growth rate via capital-labor substitution.
- If capital grows faster (gw > gn), it uses more capital-intensive techniques, reducing gw.
- If labor grows faster (gn > gw), it drives more labor-intensive techniques, increasing gw.
- Claims poorer nations grow faster due to higher marginal returns on capital, promoting convergence in per capita incomes.
Production Function Approach to Analysis of Growth
- Uses a neoclassical production function to link aggregate output to labor, capital, and technical progress.
- Elasticities of output concerning labor and capital enable estimation of their contributions to growth.
- Developed countries show technical progress as key to growth; in contrast, developing nations show capital input as crucial.
- The production function approach is flexible, allowing the inclusion of various growth-inducing variables, e.g., education and R+D.
New (Endogenous) Growth Theory
- Emerged in the 1980s, challenging diminishing returns assumptions in neoclassical theory.
- Empirical evidence indicates no convergence in global economies due to sustained high marginal products of capital in rich countries.
- Human capital (education) and R+D are identified as vital growth factors.
- Conditional convergence may occur if education levels across nations were equal, leading to 'catch up' by poorer countries.
Growth Diagnostics and Binding Constraints on Growth
- Examines unique growth experiences across countries and identifies binding constraints affecting growth rates.
- Variability in country growth patterns highlights the need for tailored growth diagnostics.
- Identifies potential causes for low investment: finance availability, cost of finance, low investment returns, etc.
- World Bank Commission emphasizes successful countries have high savings and investment, fast export growth, macroeconomic stability, technological advancements, and market-friendly policies.
Learning Objectives
- Understand classical economists' views on economic growth.
- Familiarity with Harrod-Domar and Solow neoclassical growth models.
- Grasp the production function's role in understanding growth sources.
- Recognize key arguments from endogenous growth theory.
- Comprehend the significance of growth diagnostics in identifying growth constraints.
Summary
- Early economists had differing views on growth, with Smith optimistic and others more pessimistic.
- Harrod's model re-energized growth theories in 1939.
- Solow's model suggests long-term equilibrium growth may be achievable.
- Production function studies differentiate the importance of technical progress in developed countries versus capital input in developing countries.
- Endogenous growth theory explains persistent disparities in living standards through non-diminishing returns and human capital.
- Growth diagnostics are necessary to understand individual country experiences and obstacles to growth.
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Description
This quiz covers Chapter 4 of the Economics of Development course, focusing on various theories of economic growth. Topics include classical growth theory, Harrod-Domar model, neoclassical model, and endogenous growth theory. Test your understanding of these critical growth concepts and their implications for developing countries.