1. MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
4/27/2019
MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
2nd edition
Endogenous Growth and Convergence
PowerPoint by Beth Ingram
University of Iowa
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.

2. Key Concepts Endogenous growth Conditional convergence Poverty traps
Steady state determinants

3. Sources of growth Exogenous growth (Solow model) Endogenous growth
Capital produces growth until economy reaches steady state
Continuous growth arises from technological progress
Technological progress is exogenous to model
Endogenous growth
Provide explanation internal to the model

4. Constant MPK Output Capital Stock Output = AK K: Capital Y: Output
A: Parameter
s: Investment Rate
Output
Investment = sY
Depreciation
Capital Stock

5. Constant MPK Output Capital Stock Output = AKLb Investment = sY
Depreciation K0 K1
Capital Stock

6. Does constant MPK make sense?
Interaction between physical and human capital
Suppose increase in K induces increase in human capital?
Consider IT investment and education
This represents a spillover effect

7. In equation form Output = A x (Human capital)b x Ka x Lc
Output = A x (DxK)b x Ka x Lc
Output = A x (D)b x Ka+b x Lc

8. Social versus Private Return
Output = A x (DxK)b x Ka x Lc
Private Return measured by this term

9. Social versus Private Return
Output = A x (DxK)b x Ka x Lc
Extra return due to spillover effect

10. Case: a + b < 1 Marginal product of capital Cost of Capital, r/p
Social MPK
Private MPK KP KS
Capital Stock

11. Effect of subsidy Private MPK Social MPK Marginal product of capital
Cost of Capital
Cost of Capital with subsidy KP KS
Capital Stock

12. Poverty Traps Increasing MPK MPK Marginal product of capital
Cost of Capital, r/p K0
Capital Stock
MPK is less than cost of capital, so capital decreases to zero

13. Poverty Traps Increasing MPK MPK Marginal product of capital
Cost of Capital, r/p K0
Capital Stock
MPK is higher than cost of capital, so capital increases continuously

14. Why increasing MPK? Agglomeration Interdependencies in inputs
Spillovers
Increasing MPK leads to income divergence between sectors (states, countries, etc.)

15. Just the facts, Ma’am What does the data say about convergence?
What does convergence mean empirically?
Levels of income should coincide in the long run
Low income countries grow faster than high income countries
Higher MPK for low income countries

16. Growth and per capita GDP
Annual Growth rate,
Real GDP per capita 1980, USD
Source: Penn World Table

17. Top 10 in Real GDP per capita, 1980
Ireland
Annual Growth rate,
USA
Switzerland
Argentina
Real GDP per capita 1980, USD

18. Conditional Convergence
Little evidence of convergence across all countries
Some evidence of convergence for select, similar countries
Countries may have different steady states

19. Two Steady States Output Depreciation Real GDP Investment (30% of GDP)
SS 1
SS 2
Capital Stock

20. What determines the steady state?
Level of investment and savings
Accumulation of human capital (education)
Government policies
Economic environment (e.g., corruption, property rights, crime)

21. Empirical Evidence Data supports conditional convergence
Investment, education, health have positive effects on growth
Effects of other variables are harder to discern in available data

22. Determinants of steady state for selected countries, 2001 Table 6.2

23. 4/27/2019
Why is Africa so poor?
Africa Focus is a site with lots of info on Africa, including country studies.

24. Possible explanations
Ethnic/linguistic diversity
Climate and disease
Colonial influence
The impact of aid

25. Summary Constant MPK Increasing MPK (spillovers and interactions)
Poverty traps
Factors affecting steady state
The example of Africa
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.