Core Macroeconomics, Hilary Term 2014

Week 1: 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 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 in the more advanced books. The difference is simply 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 chapters of Carlin & Soskice are 13-14, but I cannot recommend this as your starting point. I find these chapters a difficult read. (Also, there are a handful of errors, for example in Fig. 14.1. I believe you can download an errata corrige sheet for the book from the publisher.)

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, in addition to Carlin & Soskice 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 ca be obscured by all the technique.

Here are two suggestions for literature on growth theory and evidence:

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 of not more than 2000 words on the following question.

Analyse the impact of encouraging a) capital inflows and b) labour inflows on the growth rate of GDP per capita. What effect does devoting a greater share of GDP to human capital accumulation have on the level and growth rate of output?

Hint: For the First part, contrast the predictions of the Solow model with those of endogenous growth models. In the case of labour inflows, how is the evolution of technology different depending on parameter assumptions of Romer vs Jones? Similarly, how do the effects of capital accumulation differ across the Lucas and Mankiw-Romer-Weil models of human capital?