ECO342H1 Lecture Notes - Lecture 6: Conditional Convergence, Capital Accumulation, Human Capital
ECO342 – Lecture 6
06 Endogenous Growth:
- Is technology endogenous or exogenous?
Robert Lucas (1988):
- does not support the Solow model finding of convergence if countries have same tech and
savings rates without capital and labour mobility
- rapid population growth happened in rich and poor countries; labour shares were also lower in
poor countries but they didn’t grow faster
- poorer countries had lower savings which meant higher rates of interest, but could not explain
the changes in savings rates without spontaneity
- he deems that TECHNOLOGY is the one factor that can explain the variation seen across
countries
- he does not accept the belief that technology is exogenous
- he proposes human capital accumulation: there is internal accumulation (learning for oneself)
of human capital and external accumulation (learning from others, knowledge spreading)
- interactions between individuals are crucial for worker productivity; Jane Jacobs’s book The
Economy of Cities is cited as proof of interaction between different parts of a city
- but his model does not greatly improve on the Solow model to explain the US 1909-1957
Mankiw et al (1988)
- He claims that the Solow model only predicts the convergence of to a country’s steady state,
not cross-country convergence
- But we do get conditional convergence by adding savings, pop growth and human capital
- “if poor countries have the same savings, growth rates and education as rich countries, they will
converge”
Economies of Scale:
Adam Smith (1776):
- defines per capita income as the total output divided by the population
- posits that the two ways to increase per capita income is to
1. Increase productivity of labour
2. Increase in population working in “useful” labour
- Focuses on the first part; claims that productivity is a function of the division of labour
1. People get better at their task over time
2. Save time if one person specializes in one task, not needing to change tasks
constantly
3. Creation of machines (capital) to aid the production of products
- he claims that the division of labor is limited by the extent of the market; if you grow the
market (like through international trade) you can grow the economy; therefore, improvements in
the productivity of workers are due to ECONOMIES OF SCALE
- this drives technological change
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Document Summary
Does not support the solow model finding of convergence if countries have same tech and savings rates without capital and labour mobility. Rapid population growth happened in rich and poor countries; labour shares were also lower in poor countries but they didn"t grow faster. Poorer countries had lower savings which meant higher rates of interest, but could not explain the changes in savings rates without spontaneity. He deems that technology is the one factor that can explain the variation seen across countries. He does not accept the belief that technology is exogenous. He proposes human capital accumulation: there is internal accumulation (learning for oneself) of human capital and external accumulation (learning from others, knowledge spreading) Interactions between individuals are crucial for worker productivity; jane jacobs"s book the. Economy of cities is cited as proof of interaction between different parts of a city. But his model does not greatly improve on the solow model to explain the us 1909-1957.
