Kaldor's Facts & Solow-Swan Model

Kaldor's Stylized Facts and the Solow-Swan Model

• Nicholas Kaldor identified patterns in economic growth in 1955, called "stylized facts" based on roughly a century of data

• Stylized facts include:

  • Stable ratio of investment to output
  • Capital to output ratio does not significantly change
  • Capital/worker and output/worker grow at a constant rate
  • Real wages rise steadily
  • Stable real interest rate
  • Constant share of income paid to capital and labor

• The Solow- Swan model offers a theoretical explanation for these observations assuming:

  • Constant saving rate
  • Production function with diminishing returns to capital

• The economy converges to a balanced growth path or steady state in the basic Solow framework

• Output and capital grow at the same rate, keeping the capital-to-output ratio constant in a steady state

• With labor-augmenting technological progress, capital per worker and output per worker both rise at a constant rate

• A Cobb- Douglas production function explains why labor and capital shares of output remain constant

• Real interest rate remains stable due to a constant rate of technological progress and stable marginal product of capital

• Labor productivity rises steadily due to technical improvements, resulting in real wage increases

• Short-term fluctuations, policy changes, and shocks cause deviations from these patterns

• The Solow-Swan model is consistent with Kaldor's list by describing average, long-run behavior under stable conditions with exogenous technological growth

Demographic Transition in Sweden (1850–1950)

• Between 1850 and 1950, Sweden saw shifts in mortality and fertility known as the "demographic transition"
• Initial mortality rate declines were linked to public health improvements, nutrition, and medical science
• Birth rates remained high initially, leading to quick population growth
• Families later recognized changes to economic realities linked to an industrial life, and birth rates began to drop
• Eventually fertility and mortality rates converged at lower levels, slowing population growth
• The net reproduction rate (NRR) assesses how many daughters a woman will have, accounting for fertility and mortality rates
• An NRR of 1 means each generation replaces itself, stabilizing the population without migration
• The Total Fertility Rate (TFR) indicates the average number of children per woman, without directly accounting for mortality patterns
• Industrialization changed costs and benefits perceptions of having children, shifting from child labor in agrarian economies to investment in education and housing in cities and wage labor economies
• As incomes rose, the opportunity cost of child upbringing increased, leading families to favor quality over quantity, which means fewer children
• Higher incomes increase financial capacity but raise the value of parental time, decreasing fertility rates in the long run

Trade Openness and Growth: Sweden's Free-Trade Area (1865)

• In 1865, Sweden joined a free- trade area with Britain, France, and other European countries
• This coincided with an accelarated increase in exports and imports, and improved Sweden's economic growth rate
• While trade liberalization can foster growth through specialization and technology transfer, Sweden's economy may have been on a growth trajectory because of domestic institutional reforms or technological advances
• Trade openness leads to long term development through access to diverse inputs, best practices, and foreign capital if policies inspire investor confidence
• Gains can increase productivity and living standards but depend on institutional context like legal systems and infrastructure
• Sweden's successful economy development highlights how open economies can flourish, but there's no direct causation between “trade causes growth,” and the historical events should be interpreted carefully

Easterly on Physical Capital, Human Capital, and Growth in Africa

• Economist William Easterly notes that accumulating physical capital does not pull poorer nations out of poverty
• He argues that capital alone has limited impact given diminishing returns, where more capital does not create the same output increase
• Capital's share of output in a production function is modest, requiring large investments to significantly impact GDP
• Development thinking shifted towards prioritizing education and training through "human capital"
• Evidence from African countries (1960-1990) shows that schooling did not result in sustained growth
• Reasons include:
  • School Enrollment can dilute educational quality with unqualified teachers and insufficient resources
  • Curricula aren't aligned with labor market needs, preventing higher enrollment from raising productivity
  • Governance and political instability diminish schooling gains, preventing even well-educated graduates to contribute to domestic growth
  • Brain drain occurs as skilled individuals seek opportunities elsewhere
• Growth involves more than just physical/human capital accumulation
• Stable institutions, investment-friendly conditions, and public administration ensure that capital translates to lasting progress

Summary

• Stylized facts of Kaldor largely resonate with the Solow-Swan model, under constant saving rates with technological advancements
• Demographic transition in Sweden shows how economy structure shifts and improved incomes can lower fertility, yielding stable population growth
• Sweden's free trade experience suggests international openness fosters economic expansion, plus concurrent reforms and developments
• Easterly's critique says that capital or schooling expansions in postcolonial Africa relies on institutional settings and holistic development policies

Population Growth in the Solow-Swan Model and Malthusian Theory

• Population growth in the Solow- Swan model dilutes available capital among more workers, impacting steady state income and consumption per capita if the population rate increases
• If population growth remains high, the model predicts capital per worker settles at a lower level if saving and technology is unchanged
• Unexpectedly high population growth reduces long run output and consumption, although total output keeps rising as the labor force grows, lowering individual worker income
• Thomas Malthus believed population growth and income were linked through subsistence constraints, increasing income led to rising population, which would push real incomes back to near subsistence
• Falling per capita incomes would slow population growth through higher mortality, eventually raising incomes, resulting in long term income trapped at or near survival levels
• Malthus was disproved because technology outpaced resource constraints and the Industrial Revolution allowed output to grow faster than population
• Fertility decisions now respond to education, urbanization, and contraception
• Modern view highlights population growth that can spur innovation, enable specialization, and increase foreign investment
• Larger populations can generate more ideas and new endeavors if policies facilitate new knowledge, benefiting growth under the right conditions

Incorporating Human Capital into Growth Models

• The Traditional Solow-Swan Framework focuses on Physical Capital and Labor with homogenous production

• Modern Growth analyzes human capital via education, training, and health investments for national income differences

• Health improvments mean labor productivity is enhanced via reduced illness and keeps people working

• It encourages schooling as healthy children attend more regularly, improving productivity

• Education contributes to growth

  • Wages can be attributed to basic labor compared to additional schooling

• Higher wages encourage further education and skills

• Education improves total value of produced goods

• Deciding how many years to spend in school occurs by evaluating studying cost

• Post tax return on education gets reduced by progressive taxation of labor income, but can still fund public services

Hobbes, Property Rights, and the “State of Nature" Game

• Thomas Hobbes Said that without a central authority, life would be fearful of theft, and conflict would undermine productive activity
• Full specialization of individuals could produce goods, but with no legal authority, both would steal from each other
• The act of stealing incurs costs in lost production and efforts
• Investing in stealing may yield short term gain, with decline in total goods produced
• Repeated interactions, cooperation emerges if both refrain from theft
• If mistrust occurs then self-enforcement can break down
• Formal legal structure solves this with punishment eliminates incentive to devote resources to predation

Easterly, Romer, and Increasing Returns: Leaks, Matches, Traps, and Circles

• William Easterly talks about Paul Romer's theory on how new technology will lead to an overall rise in the economy.
• However Easterly goes on to list concepts such as "Leaks" where knowledge flows out of a region reducing local gain causing skilled workers to emigrate
• "Matches" stating how innovations need the right infrastructure, right environment and human capital to take off
• "Traps" Where where low productivity will feed on itself and discourage effort to break stagnation
• "Circles" Captures the idea that growth will reinforce positively/negatively. In a positive, capabilities that improve will draw in investment while in the negative has weaker economies

International Trade, Factor Mobility, and a Country's Long-Run Growth

• Swedish government considered job restrictions for foreign workers with highly skilled encouragement, raising trade and factor mobility questions
• More efficient global allocation of resources result from open trade
• Firms benefit from matching worker skills
• Tension between protecting local labor and labor shortages
• Companies benefit from recruiting high and low skilled workers
• This speeds up crucial projects
• Immigration leads to lower prices
• If suppression of wages occurs in low skilled sectors then this benefit is not for everyone

China's Attempts to Boost Population Growth

• China moved to a position that allows up to three children per couple after abolishing the “one-child policy”
• China's population rate is unlikely to rebound from a sustained fertility decline
• High housing and education costs increased
• Norms societal and personal reduced feasibility of multiple children
• Government concerned on how society ages because fertility rates remain low
• It hopes to avert rapid aging by encouraging families
• Family planning may not spur deep structural reforms
• Necessary family behavior can be improved by improving childcare

Lant Pritchett on the Returns to Labor Mobility and Education

• Pritchett believes Nigerian worker can raise wages by moving from US workers to another country
• Workers in better economy do better with capital intensity due to productivity
• “place premium,” explains that locating in more economic boosts
• Pritchett points to the problem of "Where has all the education gone?"
• There are multiple reasons on why schooling has not increased
• Poor or ineffective schooling and work opportunities

Kaldor's Stylized Facts and the Solow-Swan Model

• Nicholas Kaldor discussed broad regularities in economic growth for a century, dubbing them "stylized facts," which includes:
  • Steady investment to output ratio
  • Roughly constant capital to output
  • Steady growth in capital /Worker
  • Persistently increasing wages
  • Long term capital and labor shares in natural income
• Assumptions are made with Solow swan because it includes:
  • Cobb Douglas
  • The rate of technical changes has to improve the increase in labor
  • If assumptions of the output does not change much in the long run
  • output continues to grow in the steady state, which improves technology

The Total Fertility Rate (TFR), the Net Reproduction Rate (NRR), and Their Links to Economic Growth

• The total fertility rate (TFR) shows how many children that women need
• NRR means that if you take mortality and age of mothers, and use a NRR of one it means the population does not shrink/grow
• TFR declines as income rises in "demographic transition"
• With poverty and agriculture families increase children to offset mortality
• As income increases Children increase expenses and the effect the growth depending on saving
• If saving increase the income increase as well

Rising Government Expenditure as a Share of GDP

• Worldwide government increases based on shared countries, and increased costs in expenditures
• Many countries had influences as a range on factors
• Social welfare is important
• Wanger's law is important
• Public services demand rises
• Infrastructure projects rise
• Modern economics
• Investment and technology
• Human capital
• Social protection rise

Easterly on Physical Capital Accumulation and the Limits of Human Capital Formation in Africa

• Physical capital alone is not enough to get over poverty
• Human capital improves the focus on schooling
• Between 1960 and 1990 schooling occurred
• Too few teachers occur
• Broad environment affects educated worker
• Brain drain can occur if graduate leave for other opportunity

The Long-Run Real Interest Rate: Trends and the Solow-Swan Perspective

• Figures depicting of real interest rate from 14th century has decreased
• The point in which it suggest zero interest
• Capital shows what needs to be steady to equal interest
• The addition to Solow swan says constant rate
• Kaldor did not have back data showing zero rate, in which one may argue what should be lower than text

Rising Income Inequality in Sweden: Possible Explanations

• Sweden's data indicate upward trend in inequality even though capita grew percent per year
• Export to GDP increased
• working ages happened to get equalized
• A factor includes change where Sweden
• Became better with global trades, in which countries compete
• As technology gains more wages are occurring

"Jaw-Dropping” Global Crash in Fertility: Growth Implications

• Fertility rates have plummeted world wide
• If the population increase happens it allows boost on a capital per-capita
• Sharp decrease in fertility might lead to aged population
• Without younger people economies face shortages

Solow-Swan, Capital-Labor Ratios, and the Lucas Paradox

• The "Lucas Paradox" asks whether capital will flow from wealthy countires to poor ones where capital should earn higher due to scarcity
• Solow -Swan says flows would be small
• Policy and uncertainty exist so countires dont give assistance
• Factors determine effective capital, meaning no capital will go there without lacking
• Nations should want capital flow over time

From Kaldor's "Stylized Facts" to Jones and Romer's Updates

• Nicholas Kaldor's facts improved economic growth for longer runs like Capital to Share ratio
• These models were strong with growth and diminishing returns
• Facts helped economist know state and data being assessed
• Jones and Romer revisited light ideas with economic search
• Jones said while Kaldor had strong nation pattern some nations have not converged others had stopped growing

Population Growth and Economic Development: Malthus versus Solow, and

Modern Perspectives

• In Solow population influences stock and per work capital with the more it goes up
• If not with saving it leads to a lower level
• Malthus thought it could be erased with a larger population and they would marry earlier
• the population would push down to poverty
• A larger population might be better because it leads to innovators and markets
• It needs to be strong

A Simple Economy Producing Bread and Cheese with Fixed Proportions

• There should be both bread and cheese to show off
• Each has similar amount
• technology shows up at rate percentages increases how things are done
• A good amount of time and if formulas were put more can come and be added