Economics of Development Chapter 4

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Questions and Answers

What does the Neoclassical growth model predict about the long-term behavior of economies?

They will intensify disparities in productivity.

They will converge on the natural rate of growth. (correct)

They will experience constant technological stagnation.

They will become more structurally similar over time.

In the Neoclassical model, what is the effect when capital grows faster than labor?

Implementation of less capital-intensive technologies. (correct)

Adoption of more labor-intensive techniques.

Reduced incremental capital-output ratio.

Increased marginal product of labor.

Which factor was found to be the most important for growth in developing countries according to studies using the production function approach?

Diminishing returns to labor.

Innovation in production techniques.

Technical progress.

Capital input. (correct)

What is the implication of the assumption of diminishing returns to capital in the Neoclassical model?

Poor countries with little capital will grow faster than rich countries. Signup and view all the answers

What does the term 'technical progress' refer to in the context of growth?

The residual component in measuring output growth. Signup and view all the answers

How does the Neoclassical model suggest labor and capital inputs affect economic growth?

They alter the elasticity of output. Signup and view all the answers

What criticism does the Neoclassical model have towards the Harrod model?

It does not provide mechanisms to equilibrate gw and gn. Signup and view all the answers

Why is the production function considered versatile in growth analysis?

Any growth-inducing variable can be included for measurement. Signup and view all the answers

What is most strongly associated with sustained growth in successful countries?

High savings and investment rates Signup and view all the answers

Which growth model emphasizes long-run equilibrium growth?

Solow Neoclassical Growth Model Signup and view all the answers

What major factor is considered an exogenous element in the neoclassical production function?

Capital inputs Signup and view all the answers

What does the term 'growth diagnostics' refer to?

Understanding binding constraints on growth Signup and view all the answers

What characterizes successful developing economies according to growth theories?

Market-friendly policies Signup and view all the answers

Which classical economist is known for optimism regarding growth?

Adam Smith Signup and view all the answers

What aspect of growth does 'new' (endogenous) growth theory specifically address?

Why living standards across countries are not converging Signup and view all the answers

What does empirical studies using production functions primarily demonstrate about developed countries?

Importance of technical progress Signup and view all the answers

What phenomenon is associated with non-diminishing returns to capital?

Human capital formation Signup and view all the answers

What limitation is identified in ‘New’ growth theory regarding individual countries?

It cannot adequately explain the growth experiences of individual countries. Signup and view all the answers

What is necessary to identify constraints on economic growth according to the content?

Growth diagnostics Signup and view all the answers

What does endogenous technical progress relate to in growth theory?

Ongoing innovations influenced by internal factors Signup and view all the answers

Which of the following is NOT mentioned as an aspect of growth diagnostics?

Improving human capital Signup and view all the answers

What does new (endogenous) growth theory challenge?

The idea of diminishing returns to capital. Signup and view all the answers

Which factor is considered key in the new (endogenous) growth theory?

Research and development (R+D) Signup and view all the answers

What is conditional convergence in the context of growth theory?

Convergence if certain conditions, like education levels, are met. Signup and view all the answers

What is the primary goal of growth diagnostics?

To identify why growth does not persist over time. Signup and view all the answers

What could be a reason for low investment according to growth diagnostics?

Lack of finance or high costs of finance. Signup and view all the answers

What misconception exists regarding the experience of individual countries based on macrodeterminants of growth?

Individual country growth can be volatile and not persistent over time. Signup and view all the answers

Which assumption does the new growth theory contradict regarding rich and poor countries?

There is constant marginal product of capital across all nations. Signup and view all the answers

What is a likely consequence if the education levels are not the same across countries according to the discussed growth theories?

It may hinder the possibility of conditional convergence. Signup and view all the answers

What does the classical growth theory emphasize as a key factor for economic growth?

Division of labour and increasing returns in industry Signup and view all the answers

According to the Harrod-Domar growth model, what happens when the actual growth rate does not equal the warranted equilibrium growth rate?

Cyclical fluctuations occur Signup and view all the answers

What is the natural growth rate determined by in the Harrod-Domar growth model?

Labour force growth and technical progress Signup and view all the answers

Which classical economist predicted the breakdown of capitalism due to a falling rate of profit?

Karl Marx Signup and view all the answers

What occurs if the warranted equilibrium growth rate is greater than the natural growth rate according to the Harrod-Domar growth model?

Structural unemployment and inflation Signup and view all the answers

What did Adam Smith view as a limitation to the division of labour?

Extent of the market Signup and view all the answers

Which of the following describes the Harrod-Domar model's perspective on capital accumulation in developing countries?

It is often outpaced by labour and technical progress. Signup and view all the answers

What did Malthus and Ricardo's views on agricultural returns lead them to predict?

Famine and rises in food prices due to diminishing returns Signup and view all the answers

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.