Core Macroeconomics, Hilary Term 2017

Week 6: Economic Growth

Growth theory is fascinating, but not easy. What makes it challenging is that the models are dynamic, meaning they explicitly describe how variables change over time. This makes them technically more difficult than comparative static models like IS-LM.

Concentrate on learning well the basic Solow model with technical progress. The model without technical progress cannot explain sustained growth and is taught only as a stepping stone, only for its usefulness in building up to the model with technical change. Without losing track of the important policy-relevant points (e.g. the savings rate does not affect the rate of growth in the long-run), do make an effort to understand the maths. Once you are comfortable with the Solow model, then turn to endogenous growth, biased technical change and the empirical evidence on growth.

Readings

Start with whatever textbook you liked best in introductory macro. Mankiw, Burda & Wyplosz, De Long, Blanchard, and Jones all have good chapters on growth. The model they introduce really is the same model as that in the more advanced books. The difference is just the level of detail and range of issues covered. Also, these books use discrete time rather than continuous, but for our purposes this is not significant.

I would then proceed to the lecture notes, which can be downloaded from the usual site.

The relevant part of C&S is chapter 8.

A book you probably did not encounter last year is Economic Growth by David Weil. Really it is a mix of development economics and growth. It does not offer a compact treatment of the issues we are interested in, which are spread across several different chapters. But it is full of interesting data, facts, and discussions of issues such as population growth.

Consider in particular:
Jones, Charles. Introduction to Economic Growth. New York; London : W.W. Norton, 2002 (2nd ed.). Jones is a short, very readable book. Chapters 1-3 give a quick introduction, the Solow model, human capital, and some empirics. Later chapters cover endogenous growth. Jones has a good chapter on endogenous growth, some of which is understandable, in the Handbook of Economic Growth, vol. 1B, Ch. 16 "Growth and Ideas". You should have online access via the library's website.

For more advanced texts you could consider a range of advanced macro and specialist growth theory texts.

One possibility is
Romer, David. Advanced Macroeconomics, Chs. 1-3.
Romer is good, but in parts technically difficult, esp. Ch. 2. So I would start with something else and then consult Romer in search of a different perspective, or different empirical examples.

There are growth theory texts by Barro & Sala-i-Martin, Aghion & Howitt, and Acemoglu. These are all good, but I'm not sure they offer a better treatment of the issues you need to understand at this point, and their insights can be obscured by all the technique.

Here are two suggestions for literature on growth theory and evidence (maybe you can find something good that is newer):

Temple, J. "The New Growth Evidence," Journal of Economic Literature, vol. 37, no. 1 (March 1999), pp. 112-56.

Crafts, Nick, "'Post-neoclassical Endogenous Growth Theory': What Are its Policy Implications?", Oxford Review of Economic Policy, vol. 12 (1996), no. 2 pp. 30-47.

There is also useful material on the empirics of economic growth in the Handbook of Economic Growth vol. 1A.

Assignment

Please write an essay on one of the following questions. Neither is particularly easy, but both are important and interesting. And they should help you develop your understanding of the standard Solow model, which is our main objective this week. You don't have to have a brilliant new insight, nor to consider every possible variant of a growth model, to write a good essay.


A. In his much-discussed, 2014 book Capital in the Twenty-First Century, Thomas Piketty predicts that inequality in the advanced economies will get worse in decades to come. In particular, capital's share of income will increase. Leading to this outcome will be a rise in the capital/income ratio, a fall in the growth rate, and a steady return on capital. Are any or all these predictions compatible with the Solow model?

B. The standard version of the Solow model has just capital and labour as factors of production; it omits natural resources. What if we augment the model by including a fixed stock of natural resources as a factor of production like K and L? Does the model still behave as before? Is sustained growth still possible?