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Introduction to Modern Economic Growth

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Introduction to Modern Economic Growth Introduction to Modern Economic Growth Daron Acemoglu Department of Economics, Massachusetts Institute of Technology Contents Preface xi Part 1. Introduction 1 Chapter 1. Economic Growth and Economic Development: The Questions 3 1.1. Cross-Country Income Differences 3 1.2. Income and Welfare 8 1.3. Economic Growth and Income Differences 11 1.4. Origins of Today’s Income Differences and World Economic Growth 14 1.5. Conditional Convergence 19 1.6. Correlates of Economic Growth 23 1.7. From Correlates to Fundamental Causes 26 1.8. The Agenda 29 1.9. References and Literature 32 Chapter 2. The Solow Growth Model 37 2.1. The Economic Environment of the Basic Solow Model 38 2.2. The Solow Model in Discrete Time 48 2.3. Transitional Dynamics in the Discrete Time Solow Model 61 2.4. The Solow Model in Continuous Time 66 2.5. Transitional Dynamics in the Continuous Time Solow Model 71 2.6. Solow Model with Technological Progress 79 2.7. Comparative Dynamics 92 2.8. Taking Stock 94 2.9. References and Literature 95 2.10. Exercises 97 Chapter 3. The Solow Model and the Data 103 3.1. Growth Accounting 103 3.2. Solow Model and Regression Analyses 107 3.3. The Solow Model with Human Capital 117 3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 125 3.5. Calibrating Productivity Differences 135 iii Introduction to Modern Economic Growth 3.6. Estimating Productivity Differences 141 3.7. Taking Stock 148 3.8. References and Literature 150 3.9. Exercises 151 Chapter 4. Fundamental Determinants of Differences in Economic Performance 155 4.1. Proximate Versus Fundamental Causes 155 4.2. Economies of Scale, Population, Technology and World Growth 160 4.3. The Four Fundamental Causes 163 4.4. The Effect of Institutions on Economic Growth 178 4.5. What Types of Institutions? 199 4.6. Disease and Development 202 4.7. Political Economy of Institutions: First Thoughts 206 4.8. Taking Stock 207 4.9. References and Literature 208 4.10. Exercises 211 Part 2. Towards Neoclassical Growth 213 Chapter 5. Foundations of Neoclassical Growth 215 5.1. Preliminaries 215 5.2. The Representative Household 218 5.3. Infinite Planning Horizon 226 5.4. The Representative Firm 229 5.5. Problem Formulation 232 5.6. Welfare Theorems 233 5.7. Sequential Trading 241 5.8. Optimal Growth in Discrete Time 245 5.9. Optimal Growth in Continuous Time 246 5.10. Taking Stock 247 5.11. References and Literature 248 5.12. Exercises 250 Chapter 6. Dynamic Programming and Optimal Growth 255 6.1. Brief Review of Dynamic Programming 256 6.2. Dynamic Programming Theorems 260 6.3. The Contraction Mapping Theorem and Applications* 266 6.4. Proofs of the Main Dynamic Programming Theorems* 272 6.5. Fundamentals of Dynamic Programming 280 6.6. Optimal Growth in Discrete Time 291 6.7. Competitive Equilibrium Growth 297 6.8. Another Application of Dynamic Programming: Search for Ideas 299 iv Introduction to Modern Economic Growth 6.9. Taking Stock 305 6.10. References and Literature 306 6.11. Exercises 307 Chapter 7. Review of the Theory of Optimal Control 313 7.1. Variational Arguments 314 7.2. The Maximum Principle: A First Look 324 7.3. Infinite-Horizon Optimal Control 330 7.4. More on Transversality Conditions 342 7.5. Discounted Infinite-Horizon Optimal Control 345 7.6. A First Look at Optimal Growth in Continuous Time 351 7.7. The q-Theory of Investment 352 7.8. Taking Stock 359 7.9. References and Literature 361 7.10. Exercises 363 Part 3. Neoclassical Growth 371 Chapter 8. The Neoclassical Growth Model 373 8.1. Preferences, Technology and Demographics 373 8.2. Characterization of Equilibrium 378 8.3. Optimal Growth 383 8.4. Steady-State Equilibrium 384 8.5. Transitional Dynamics 387 8.6. Technological Change and the Canonical Neoclassical Model 390 8.7. Comparative Dynamics 398 8.8. The Role of Policy 400 8.9. A Quantitative Evaluation 402 8.10. Extensions 405 8.11. Taking Stock 406 8.12. References and Literature 407 8.13. Exercises 408 Chapter 9. Growth with Overlapping Generations 417 9.1. Problems of Infinity 418 9.2. The Baseline Overlapping Generations Model 421 9.3. The Canonical Overlapping Generations Model 427 9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 429 9.5. Role of Social Security in Capital Accumulation 433 9.6. Overlapping Generations with Impure Altruism 436 9.7. Overlapping Generations with Perpetual Youth 441 9.8. Overlapping Generations in Continuous Time 445 v Introduction to Modern Economic Growth 9.9. Taking Stock 453 9.10. References and Literature 455 9.11. Exercises 456 Chapter 10. Human Capital and Economic Growth 463 10.1. A Simple Separation Theorem 463 10.2. Schooling Investments and Returns to Education 466 10.3. The Ben Porath Model 469 10.4. Neoclassical Growth with Physical and Human Capital 474 10.5. Capital-Skill Complementarity in an Overlapping Generations Model 480 10.6. Physical and Human Capital with Imperfect Labor Markets 485 10.7. Human Capital Externalities 492 10.8. Nelson-Phelps Model of Human Capital 495 10.9. Taking Stock 498 10.10. References and Literature 500 10.11. Exercises 502 Chapter 11. First-Generation Models of Endogenous Growth 505 11.1. The AK Model Revisited 506 11.2. The AK Model with Physical and Human Capital 513 11.3. The Two-Sector AK Model 516 11.4. Growth with Externalities 521 11.5. Taking Stock 526 11.6. References and Literature 528 11.7. Exercises 529 Part 4. Endogenous Technological Change 535 Chapter 12. Modeling Technological Change 537 12.1. Different Conceptions of Technology 537 12.2. Science, Profits and the Market Size 542 12.3. The Value of Innovation in Partial Equilibrium 545 12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 555 12.5. Individual R&D Uncertainty and the Stock Market 562 12.6. Taking Stock 564 12.7. References and Literature 565 12.8. Exercises 567 Chapter 13. Expanding Variety Models 571 13.1. The Lab Equipment Model of Growth with Product Varieties 572 13.2. Growth with Knowledge Spillovers 586 13.3. Growth without Scale Effects 589 13.4. Growth with Expanding Product Varieties 593 vi Introduction to Modern Economic Growth 13.5. Taking Stock 598 13.6. References and Literature 600 13.7. Exercises 601 Chapter 14. Models of Competitive Innovations 609 14.1. The Baseline Model of Competitive Innovations 610 14.2. A One-Sector Schumpeterian Growth Model 623 14.3. Step-by-Step Innovations* 629 14.4. Taking Stock 645 14.5. References and Literature 646 14.6. Exercises 647 Chapter 15. Directed Technological Change 655 15.1. Importance of Biased Technological Change 656 15.2. Basics and Definitions 660 15.3. Baseline Model of Directed Technological Change 663 15.4. Directed Technological Change with Knowledge Spillovers 681 15.5. Directed Technological Change without Scale Effects 686 15.6. Endogenous Labor-Augmenting Technological Change 688 15.7. Other Applications 692 15.8. Taking Stock 693 15.9. References and Literature 694 15.10. Exercises 698 Part 5. Stochastic Growth 705 Chapter 16. Stochastic Dynamic Programming 707 16.1. Dynamic Programming with Expectations 707 16.2. Policy Functions and Transitions 707 16.3. Few Technical Details* 707 16.4. Applications of Stochastic Dynamic Programming 707 16.5. Taking Stock 707 16.6. References and Literature 707 16.7. Exercises 707 Chapter 17. Neoclassical Growth Under Uncertainty 709 17.1. The Brock-Mirman Model 709 17.2. Equilibrium Growth under Uncertainty 710 17.3. Application: Real Business Cycle Models 710 17.4. Taking Stock 710 17.5. References and Literature 710 17.6. Exercises 710 Chapter 18. Growth with Incomplete Markets 711 vii Introduction to Modern Economic Growth 18.1. The Bewley-Aiyagari Model 711 18.2. Risk, Diversification and Growth 711 18.3. Taking Stock 711 18.4. References and Literature 711 18.5. Exercises 711 Part 6. Technology Diffusion, Trade and Interdependences 713 Chapter 19. Diffusion of Technology 715 19.1. Importance of Technology Adoption and Diffusion 715 19.2. A Benchmark Model of Technology Diffusion 715 19.3. Human Capital and Technology 715 19.4. Technology Diffusion and Endogenous Growth 716 19.5. Appropriate Technology and Productivity Differences 716 19.6. Inappropriate Technologies 717 19.7. Endogenous Technological Change and Appropriate Technology 718 19.8. Taking Stock 723 19.9. References and Literature 723 19.10. Exercises 723 Chapter 20. Trade, Technology and Interdependences 725 20.1. Trade, Specialization and the World Income Distribution 725 20.2. Trade, Factor Price Equalization and Economic Growth 731 20.3. Trade, Technology Diffusion and the Product Cycle 732 20.4. Learning-by-Doing, Trade and Growth 736 20.5. Trade and Endogenous Technological Change 736 20.6. Taking Stock 736 20.7. References and Literature 736 20.8. Exercises 736 Part 7. Economic Development and Economic Growth 737 Chapter 21. Structural Change and Economic Growth 739 21.1. Non-Balanced Growth: The Demand Side 739 21.2. Non-Balanced Growth: The Supply Side 743 21.3. Structural Change: Migration 743 21.4. Structural Change: Transformation of Productive Relationships 743 21.5. Towards a Unified Theory of Development and Growth 743 21.6. Taking Stock 743 21.7. References and Literature 743 21.8. Exercises 743 Chapter 22. Poverty Traps, Inequality and Financial Markets 745 22.1. Multiple Equilibria From Aggregate Demand Externalities 745 viii Introduction to Modern Economic Growth 22.2. Human Capital Accumulation with Imperfect Capital Markets 754 22.3. Income Inequality and Economic Development 761 22.4.
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