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Introduction to Modern Economic Growth: Parts 1-4 Daron Acemoglu Department of Economics, Massachusetts Institute of Technology Contents iii 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 6 1.3. Economic Growth and Income Differences 9 1.4. Origins of Today’s Income Differences and World Economic Growth 12 1.5. Conditional Convergence 16 1.6. Correlates of Economic Growth 18 1.7. From Correlates to Fundamental Causes 21 1.8. The Agenda 24 1.9. References and Literature 26 Chapter 2. The Solow Growth Model 31 2.1. The Economic Environment of the Basic Solow Model 32 2.2. The Solow Model in Discrete Time 40 2.3. Transitional Dynamics in the Discrete Time Solow Model 50 2.4. The Solow Model in Continuous Time 54 2.5. Transitional Dynamics in the Continuous Time Solow Model 58 2.6. A First Look at Sustained Growth 62 2.7. Solow Model with Technological Progress 63 2.8. Comparative Dynamics 74 2.9. Taking Stock 75 2.10. References and Literature 76 2.11. Exercises 77 Chapter 3. The Solow Model and the Data 83 3.1. Growth Accounting 83 3.2. Solow Model and Regression Analyses 86 3.3. The Solow Model with Human Capital 93 3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 98 3.5. Calibrating Productivity Differences 106 3.6. Estimating Productivity Differences 111 3.7. Taking Stock 116 3.8. References and Literature 118 3.9. Exercises 119 Chapter 4. Fundamental Determinants of Differences in Economic Performance 123 iii Introduction to Modern Economic Growth 4.1. Proximate Versus Fundamental Causes 123 4.2. Economies of Scale, Population, Technology and World Growth 127 4.3. The Four Fundamental Causes 129 4.4. The Effect of Institutions on Economic Growth 139 4.5. What Types of Institutions? 153 4.6. Disease and Development 155 4.7. Political Economy of Institutions: First Thoughts 158 4.8. Taking Stock 159 4.9. References and Literature 159 4.10. Exercises 162 Part 2. Towards Neoclassical Growth 165 Chapter 5. Foundations of Neoclassical Growth 167 5.1. Preliminaries 167 5.2. The Representative Household 169 5.3. Infinite Planning Horizon 175 5.4. The Representative Firm 178 5.5. Problem Formulation 180 5.6. Welfare Theorems 181 5.7. Proof of the Second Welfare Theorem, Theorem 5.7* 188 5.8. Sequential Trading 190 5.9. Optimal Growth 194 5.10. Taking Stock 195 5.11. References and Literature 196 5.12. Exercises 197 Chapter 6. Infinite-Horizon Optimization and Dynamic Programming 203 6.1. Discrete-Time Infinite-Horizon Optimization 203 6.2. Introduction to Stationary Dynamic Programming 206 6.3. Stationary Dynamic Programming Theorems 208 6.4. The Contraction Mapping Theorem and Applications* 212 6.5. Proofs of the Main Dynamic Programming Theorems* 217 6.6. Fundamentals of Stationary Dynamic Programming 224 6.7. Nonstationary Infinite-Horizon Optimization 235 6.8. Optimal Growth in Discrete Time 239 6.9. Competitive Equilibrium Growth 244 6.10. Computation 245 6.11. Taking Stock 246 6.12. References and Literature 246 6.13. Exercises 248 Chapter 7. Review of the Theory of Optimal Control 253 7.1. Variational Arguments 254 7.2. The Maximum Principle: A First Look 262 7.3. Infinite-Horizon Optimal Control 267 7.4. More on Transversality Conditions 278 7.5. Discounted Infinite-Horizon Optimal Control 281 7.6. Existence of Solutions, Concavity and Differentiability* 288 iv Introduction to Modern Economic Growth 7.7. A First Look at Optimal Growth in Continuous Time 296 7.8. The q-Theory of Investment and Saddle-Path Stability 298 7.9. Taking Stock 304 7.10. References and Literature 305 7.11. Exercises 308 Part 3. Neoclassical Growth 315 Chapter 8. The Neoclassical Growth Model 317 8.1. Preferences, Technology and Demographics 317 8.2. Characterization of Equilibrium 322 8.3. Optimal Growth 327 8.4. Steady-State Equilibrium 328 8.5. Transitional Dynamics 330 8.6. Neoclassical Growth in Discrete Time 333 8.7. Technological Change and the Canonical Neoclassical Model 335 8.8. The Role of Policy 341 8.9. Comparative Dynamics 342 8.10. A Quantitative Evaluation 344 8.11. Extensions 346 8.12. Taking Stock 347 8.13. References and Literature 348 8.14. Exercises 349 Chapter 9. Growth with Overlapping Generations 359 9.1. Problems of Infinity 359 9.2. The Baseline Overlapping Generations Model 361 9.3. The Canonical Overlapping Generations Model 366 9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 368 9.5. Role of Social Security in Capital Accumulation 371 9.6. Overlapping Generations with Impure Altruism 373 9.7. Overlapping Generations with Perpetual Youth 377 9.8. Overlapping Generations in Continuous Time 380 9.9. Taking Stock 386 9.10. References and Literature 387 9.11. Exercises 388 Chapter 10. Human Capital and Economic Growth 393 10.1. A Simple Separation Theorem 393 10.2. Schooling Investments and Returns to Education 395 10.3. The Ben-Porath Model 397 10.4. Neoclassical Growth with Physical and Human Capital 401 10.5. Capital-Skill Complementarity in an Overlapping Generations Model 406 10.6. Physical and Human Capital with Imperfect Labor Markets 409 10.7. Human Capital Externalities 415 10.8. The Nelson-Phelps Model of Human Capital 417 10.9. Taking Stock 419 10.10. References and Literature 420 v Introduction to Modern Economic Growth 10.11. Exercises 422 Chapter 11. First-Generation Models of Endogenous Growth 425 11.1. The AK Model Revisited 426 11.2. The AK Model with Physical and Human Capital 431 11.3. The Two-Sector AK Model 433 11.4. Growth with Externalities 437 11.5. Taking Stock 441 11.6. References and Literature 443 11.7. Exercises 443 Part 4. Endogenous Technological Change 449 Chapter 12. Modeling Technological Change 451 12.1. Different Conceptions of Technology 451 12.2. Science and Profits 455 12.3. The Value of Innovation in Partial Equilibrium 457 12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 464 12.5. Individual R&D Uncertainty and the Stock Market 471 12.6. Taking Stock 472 12.7. References and Literature 473 12.8. Exercises 474 Chapter 13. Expanding Variety Models 479 13.1. The Lab-Equipment Model of Growth with Input Varieties 479 13.2. Growth with Knowledge Spillovers 491 13.3. Growth without Scale Effects 493 13.4. Growth with Expanding Product Varieties 496 13.5. Taking Stock 500 13.6. References and Literature 501 13.7. Exercises 502 Chapter 14. Models of Schumpeterian Growth 509 14.1. A Baseline Model of Schumpeterian Growth 510 14.2. A One-Sector Schumpeterian Growth Model 519 14.3. Innovation by Incumbents and Entrants and Sources of Productivity Growth 524 14.4. Step-by-Step Innovations* 536 14.5. Taking Stock 548 14.6. References and Literature 549 14.7. Exercises 551 Chapter 15. Directed Technological Change 559 15.1. Importance of Biased Technological Change 559 15.2. Basics and Definitions 563 15.3. Baseline Model of Directed Technological Change 566 15.4. Directed Technological Change with Knowledge Spillovers 579 15.5. Directed Technological Change without Scale Effects 583 15.6. Endogenous Labor-Augmenting Technological Change 585 15.7. Generalizations and Other Applications 588 15.8. An Alternative Approach to Labor-Augmenting Technological Change * 589 vi Introduction to Modern Economic Growth 15.9. Taking Stock 594 15.10. References and Literature 595 15.11. Exercises 598 Part 5. Stochastic Growth 605 Chapter 16. Stochastic Dynamic Programming 607 16.1. Dynamic Programming with Expectations 607 16.2. Proofs of the Stochastic Dynamic Programming Theorems* 614 16.3. Stochastic Euler Equations 620 16.4. Generalization to Markov Processes* 622 16.5. Applications of Stochastic Dynamic Programming 624 16.6. Taking Stock 632 16.7. References and Literature 633 16.8. Exercises 634 Chapter 17. Stochastic Growth Models 639 17.1. The Brock-Mirman Model 640 17.2. Equilibrium Growth under Uncertainty 645 17.3. Application: Real Business Cycle Models 654 17.4. Growth with Incomplete Markets: The Bewley Model 657 17.5. The Overlapping Generations Model with Uncertainty 661 17.6. Risk, Diversification and Growth 663 17.7. Taking Stock 681 17.8. References and Literature 682 17.9. Exercises 683 Part 6. Technology Diffusion, Trade and Interdependences 689 Chapter 18. Diffusion of Technology 693 18.1. Productivity Differences and Technology 693 18.2. A Benchmark Model of Technology Diffusion 696 18.3. Technology Diffusion and Endogenous Growth 703 18.4. Appropriate and Inappropriate Technologies and Productivity Differences 708 18.5. Contracting Institutions and Technology Adoption 716 18.6. Taking Stock 729 18.7. References and Literature 731 18.8. Exercises 732 Chapter 19. Trade and Growth 739 19.1. Growth and Financial Capital Flows 739 19.2. Why Doesn’t Capital Flow from Rich to Poor Countries? 745 19.3. Economic Growth in a Heckscher-Ohlin World 747 19.4. Trade, Specialization and the World Income Distribution 757 19.5. Trade, Technology Diffusion and the Product Cycle 769 19.6. Trade and Endogenous Technological Change 774 19.7. Learning-by-Doing, Trade and Growth 777 19.8. Taking Stock 781 19.9. References and Literature 783 19.10. Exercises 785 vii Introduction to Modern Economic Growth Part 7. Economic Development and Economic Growth 791 Chapter 20. Structural Change and Economic Growth 797 20.1. Non-Balanced Growth: The Demand Side 797 20.2. Non-Balanced Growth: The Supply Side 805 20.3. Agricultural Productivity and Industrialization 818 20.4.
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