Introduction Modeling new goods Kaldor's stylized facts of economic growth

Introduction

Modeling new goods

Kaldor's stylized facts of economic growth

The neo-classical model and the Solow residual

Empirical pictures

Endogenous growth

An experiment in geographical economics

Conclusions

CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENTInternational Trade & the World Economy; Charles van Marrewijk

Explanations for trade

Classical 2. Opportunity costs 3. Comparative advantage

Neo-classical 4. Production structure 5. Factor prices 6. Production volume 7. Factor abundance

1. The world economy

New trade 9. Imperfect competition 10. Intra-industry trade

Policy

8. Trade policy

11. Strategic trade policy

12. Int. trade organizations 13. Economic integration

17. Applied trade policy modeling

Economicgeography

New interactions 14. Geographical economics 15. Multinationals 16. New goods, growth, and development

Industrialorganization

InternationalbusinessGrowth theory

Part

IPa

rt II

Part

III

Part

IV

18. Concluding remarks

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


IntroductionInternational Trade & the World Economy; Charles van Marrewijk

Objectives / key terms

New goods Variety / quality

Kaldor's stylized facts Neo-classical growth model

Solow residual Endogenous growth model

Discount rate Geography experiment

Paul Romer (1955 - )

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


Modeling new goods International Trade & the World Economy; Charles van Marrewijk

Number ofvarieties

quantity

q

Nt = 0 Nt = 1

The variety approach

variety

quality

1 2 3 4 5 9876 1413121110 1615

1

432

765

1098

1112

quality at t = 1quality at t = 0

Modeling new goods International Trade & the World Economy; Charles van Marrewijk

The quality approach

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


Kaldor's stylized facts of economic growth International Trade & the World Economy; Charles van Marrewijk

Nicholas Kaldor (1961) suggested the following list of stylized facts:

• The continued growth in the aggregate volume of production and in the productivity of labor at a steady trend rate.

• A continued increase in the amount of capital per worker.

• A steady rate of profit on capital.

• Steady capital-output ratios over long periods.

• A steady investment coefficient, and a steady share of profits and wages.


a. USA GDP per capita, 1985 US $, logarthmic scale

6

7

8

9

10

1870 1890 1910 1930 1950 1970 1990


b. USA, gross investment (% of GDP)

0

10

20

30

1960 1965 1970 1975 1980 1985 1990 1995 2000

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions

CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT International Trade & the World Economy; Charles van Marrewijk

The neo-classical model and the Solow residual International Trade & the World Economy; Charles van Marrewijk

0

1

2

3

0 5 10 15 20

capital-labor ratio k

tkn)(

E

G

F

tks

The neo-classical model and the Solow residual International Trade & the World Economy; Charles van Marrewijk

residualSolowLKYALKY ttt

increaseforcelabor

t

increasecapital

t

changetechnical

tt 'explained'

explainedbeto

~)1(~~~~)1(~~~

b. USA, actual growth and Solow residual (%)

-4

-2

0

2

4

6

1970 1975 1980 1985 1990 1995

Solow residual actual growth

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


Empirical pictures International Trade & the World Economy; Charles van Marrewijk

6

7

8

9

10

1870 1890 1910 1930 1950 1970 1990

Australia

AustriaBelgium

Canada

a

6

7

8

9

10

1870 1890 1910 1930 1950 1970 1990

ItalyNorw ay

Netherlands

Japan

c

Empirical pictures International Trade & the World Economy; Charles van Marrewijk

5

6

7

8

9

1900 1930 1960 1990

Argentina

BrazilChile

Bangladesh

a

5

6

7

8

9

1900 1930 1960 1990

Taiw an

Philippines

Thailand

d

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


Endogenous growth International Trade & the World Economy; Charles van Marrewijk

Paul Romer’s (1994) list of stylized facts:

• There are many firms in a market economy.

• Discoveries differ from other inputs in that many people can use them at the same time (nonrival goods).

• It is possible to replicate physical activities.

• Technological advance comes from things that people do.

• Many individuals and firms have market power and earn monopoly rents on discoveries.

Endogenous growth International Trade & the World Economy; Charles van Marrewijk

iallforxxxNNxY tit

mL

ttt

N

iitt

X

t

;

/

1)/1(/1

1

Production function:

tt N

L)1( Operating profit for manufactures producer

Future profits discounted; profits erode if number of varieties increases

Inventing new variety represents fixed cost; with knowledge spillovers economy steadily grows forever; growth rate higher if:

• the labor force is higher (increasing returns to scale ensure that size is important)

• the fixed costs of investment F are lower, and

• the discount rate is lower.

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


An experiment in geographical economics International Trade & the World Economy; Charles van Marrewijk

Herfindahl index

0

0.1

0.2

0.3

0.4

0.5

0 200 400 600 800

Experiment w. 12 city racetrack; Herfindahl = measure of agglomeration

An experiment in geographical economics International Trade & the World Economy; Charles van Marrewijk

Evolution of the share of manufacturing

0

0.1

0.2

0.3

0.4

0.5

0 100 200 300 400 500 600 700 800

3

6

9

36

6

6

9

Introduction

Modeling new goods



Empirical pictures

Endogenous growth


Conclusions


Conclusions International Trade & the World Economy; Charles van Marrewijk

Rising per capita income is relatively new phenomenon.

Some countries have experienced relatively steady growth, others long periods of stagnation and rapid increases.

Neo-classical model based on capital accumulation needs exogenous technological change to ‘explain’ growth; large Solow residual.

Endogenous growth models based on imperfect competition and innovation (new goods and/or quality improvements) led by entrepreneurs in search of profits.

Large swings in economic prosperity may be explained by geographical economics model.

Introduction Modeling new goods Kaldor's stylized facts of economic growth

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