1 Chapter5ConditionalConvergenceandLong RunEconomicGrowth 2 ConditionalConvergenceinPractice 3 ConditionalConvergenceinPractice Threevariablesthatinfluencedk Savingrate s Technologylevel A Populationgrowthrate n 4 ConditionalConvergenceinPractice Abroaderviewofthetechnologylevel A Productivitydependsonthedegreeofmarketefficiency Greaterinternationalopennesstendstoraiseproductivity Productivitytendstoriseifgovernmentsdobetteratmaintainingprivatepropertyrights ifthejudicialsystemrunsmoresmoothly andifofficialcorruptiondeclines 5 RecentResearchontheDeterminantsofEconomicGrowth k k k 0 k Theideaistomeasureanarrayofvariables eachofwhichinfluencesacountry ssteady statecapitalperworker k 6 RecentResearchontheDeterminantsofEconomicGrowth First ifweholdfixedk byholdingfixedthevariablesthatinfluencek thegrowthrateofcapitalperworker k k shouldexhibitconvergence Thatis forgivenk alowerk 0 shouldmatchupwithahigher k k Second anyvariablethatraisesorlowersk shouldcorrespondinglyraiseorlower k kforgivenk 0 7 RecentResearchontheDeterminantsofEconomicGrowth 8 RecentResearchontheDeterminantsofEconomicGrowth Holdconstantalistofvariablesthatinfluencek ameasureofthesavingrate thefertilityrateforthetypicalwoman whichinfluencespopulationgrowth subjectivemeasuresofmaintenanceoftheruleoflawanddemocracy thesizeofgovernment asgaugedbytheshareofgovernmentconsumptionexpendituresinGDP 9 RecentResearchontheDeterminantsofEconomicGrowth theextentofinternationalopenness measuredbythevolumeofexportsandimports changesinthetermsoftrade whichistheratioofpricesofexportedgoodstopricesofimportedgoods measuresofinvestmentineducationandhealth theaveragerateofinflation whichisanindicatorofmacroeconomicpolicy 10 RecentResearchontheDeterminantsofEconomicGrowth GrowthrateofrealGDPperpersonrisesinresponsetoahighersavingrate lowerfertility bettermaintenanceoftheruleoflaw smallergovernmentconsumption greaterinternationalopenness improvementinthetermsoftrade greaterquantityandqualityofeducation betterhealth andlowerinflation 11 RecentResearchontheDeterminantsofEconomicGrowth Democracyhasalesscleareffect ifacountrystartsfromatotalitariansystem increasesindemocracyseemtofavoreconomicgrowth However afteracountryreachesamid rangeofdemocracy characteristicinrecentyearsofIndonesia Turkey andseveralplacesinLatinAmerica furtherdemocratizationseemstoreducegrowth 12 RecentResearchontheDeterminantsofEconomicGrowth Numerousadditionalvariablesthatinfluencegrowth scopeoffinancialmarkets thedegreeofincomeinequality theextentofofficialcorruption theroleofcolonialandlegalorigins Theintensityofreligiousparticipationandbeliefs 13 ExamplesofConditionalConvergence By1946 Japan Germany France andothercountriesinEuropesufferedsharpreductionsinphysicalcapital whichresultedinalowstartingvalueofcapitalperworker k 0 Inthe1960s manyEastAsiancountries suchasSouthKoreaandTaiwan werepoorand therefore hadlowvaluesofk 0 14 Long RunEconomicGrowth SolowmodeldoesnotexplainhowcapitalandrealGDPperworker kandy growinthelongrun ThemodeldoesnotexplainhowrealGDPperpersongrewataround2 peryearforwelloveracenturyintheUnitedStatesandotherrichcountries 15 Long RunEconomicGrowth Weallowfortechnologicalprogressinthesenseofcontinuinggrowthofthetechnologylevel A Agrowsinanexogenousmanner 16 ModelswithConstantAverageProductofCapital Thediminishingaverageproductofcapital y k playsamajorroleinthetransitionphaseoftheSolowgrowthmodel k k s y k n 17 ModelswithConstantAverageProductofCapital Interpretcapitalbroadly especiallytoincludehumancapitalintheformsofformaleducation on the jobtraining andhealth Includeformsofcapitalthatareoftenownedbygovernment suchasinfrastructurecapitalusedfortransportationandutilities 18 ModelswithConstantAverageProductofCapital Ifwedoublenotonlymachinesandbuildingsbutalsohumanandinfrastructurecapital realGDPmayroughlydouble Ifrawlaborisnotacriticalinputtoproduction capital smarginalandaverageproductsmaynotdeclineascapitalaccumulates 19 ModelswithConstantAverageProductofCapital 20 ModelswithConstantAverageProductofCapital y k A k k sA n 21 ModelswithConstantAverageProductofCapital 22 ExogenousTechnologicalProgress AllowforcontinuingincreasesinA Thisregularprocessofimprovementsinthetechnologyiscalledtechnologicalprogress A A g 23 ExogenousTechnologicalProgress 24 ExogenousTechnologicalProgress 25 ExogenousTechnologicalProgress 26 ExogenousTechnologicalProgress 27 ExogenousTechnologicalProgress Sincetheaverageproductofcapital y k isconstantduringsteady stategrowth thenumeratoroftheratio y mustgrowatthesamerateasthedenominator k y y k k 28 ExogenousTechnologicalProgress 29 ExogenousTechnologicalProgress 30 ExogenousTechnologicalProgress 31 ExogenousTechnologicalProgress Exogenoustechnologicalprogressattherate A A gallowsforlong termgrowthinrealGDPandcapitalperworkerattherateg 1 Thetechnologicalprogressoffsetsthetendencyfortheaverageproductofcapital y k tofallwhenkrisesand thereby allowsforlong termgrowthinrealGDPandcapitalperworker 32 ExogenousTechnologicalProgress GrowthrateofrealGDPperpers