E2CYF1 - E1MLP1

Crecimiento Endógeno

Instructor: Cristian Maravi

Universidad de Piura

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Outline

Convergence in Solow growth model

Endogenous growth: a model of human capital accumulation

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Figure 8.1
Rich and Poor Countries and the Steady State

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Convergence in Income per Worker Across
Countries in the Solow Growth Model

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Convergence in Aggregate Output Across
Countries in the Solow Growth Model

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Convergence in Solow Growth Model

Consider two countries that are initially rich and poor, but identical in all other aspects,
including savings rate, population growth, and productivity growth. In Solow model, these
countries converge to the same level and growth rate of per-capita income in the long
run.

During transition to the steady state, poor country grows faster.

Is this true in the data?

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Growth Rate in Per Capita Income vs. Level of Per
Capita Income

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 Figure 6.5 Convergence Among the
Richest Countries

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 6-10

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Convergence in Solow Growth Model
In the data: convergence only for rich countries

Conditional convergence, rather than absolute convergence

Not consistent with Solow model if countries are identical in all other aspects except
initial conditions.

However, in practice:
(1) Population growth and savings rate can be different.
(2) z (total factor productivity) can be different across countries.
(3) Furthermore, the level and the growth rate of z can be endogenously determined.

We will first focus on (2), followed by (3).

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Convergence in Solow Growth Model

In Solow model, differences in z are crucial in explaining per-capita income disparity

across countries.

Within the framework of Solow model: different per-capita income due to different z,
even when reaching the steady state

In addition, poor countries can have not only low level of z, but also low growth rate of z.

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Differences in Total Factor Productivity Can Explain
Disparity in Income per Worker Across Countries

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Why z is Different across Countries?

It takes time to learn new technology with high z: learning-by-doing (LBD), adoption vs.
use period of the technology, etc.

There exist significant barriers to the adoption of new technology.

Misallocation of factors for production can be a reason.

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Why z is Different across Countries?

Barriers to the adoption of new technology:

Labor unions

Trade restrictions

Others

Policy implications:

Promote greater competition

Promote free trade

In addition, policy implication for misallocation?

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Alternative: Endogenous Growth Model

Solow Model is an exogenous growth model: exogenous differences in z across countries

However, the growth rate of z can be endogenously determined and therefore, differ by
countries.

For instance, poor countries cannot really grow due to endogenously determined low
growth rate.

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Endogenous Growth with Human Capital Accumulation
Among many types of the model in which per-capita growth rate is endogenously
determined, we consider the model with human capital accumulation, following Lucas
(1988).

The growth rate of per-capita income is determined by:

I Efficiency with which human capital is accumulated
I Fraction of available time devoted to accumulate human capital

Human capital: stock of skills and education embodied in people.

Knowledge is a non-rivalry good. Therefore, the acquisition of human capital has positive
externality.

It does not have the diminishing return. Here, we assume constant return to skills in
producing output.
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Representative Consumer

Representative consumer in the economy (per-capita = aggregate) who values no leisure.

To focus on the main mechanism, we assume that he cannot save:

C = w uH s

where u is the fraction of time devoted to working, H s is the current stock of human
capital.

We call uH as efficiency unit of labor.

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Human Capital Accumulation

The stock of future human capital H s 0 depends on the stock of current human capital H s and
time devoted to training and education 1 − u.

H s 0 = b (1 − u )H s

where b captures efficiency of accumulating human capital.

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Representative Firm

Production function:
Y = zuH d
Firm’s profits:
π = zuH d − wuH d = (z − w )uH d
Firm chooses uH d to maximize the profit.
I z = w , firm is indifferent of hiring any amount of uH d .
I z < w , uH d = 0
I z > w , uH d = ∞

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Determination of the Equilibrium Real Wage in the
Endogenous Growth Model

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Competitive Equilibrium

The equilibrium wage is w = z.

Labor market clears:

Hs = Hd = H

The equilibrium allocation (C , H, u ) satisfies,

C = zuH

H 0 = b (1 − u )H

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Endogenous Growth

The growth rate of human capital:

H0
− 1 = b (1 − u ) − 1
H

The same growth rate obtained for C and Y (how? try by yourself!).

This model economy does not grow because of any exogenous forces.
I n = 0 (no exogenous population growth)
I b and z are fixed (no exogenous growth as well)
I b is implicitly large enough to make the growth rate of human capital greater than 1.

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Human Capital Accumulation in the
Endogenous Growth Model

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Economic Policy and Growth

Change u through taxes or subsidies to education.

The welfare effect depends on the trade-off between current consumption and future
consumption.

Government could also increase b by education policy.

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Effect of a Decrease in u on the Consumption Path
in the Endogenous Growth Model

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Convergence in Endogenous Growth Model

Convergence does not occur even if countries are identical in all aspects but differ only in
initial level of human capital.

Higher 1 − u means higher growth rate. Hence it implies higher Y over time.

Higher education attainment =⇒ higher growth: is this true in the data?

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Figure 8.8
No Convergence in the Endogenous Growth Model

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