Lecture 3 – Era of Stagnation

Still looking at why there was no economic growth before the 18th century

Now we can ask, how does GDP/capita growth happen?

We have derived an expression for y (GDP/Capita) but now we want to focus on the
GROWTH of Y
- We need to manipulate this expression into another expression that tells us how y
changes overtime

This needs to be manipulated to show the growth rate

• In growth models, we are interested in allowing variables to change with time (t)

• So really, we should write ALL variables in our current models (Y, A X and L) as
functions of time – Y(t), A(t) …….

• However, we don’t as that would take too much time so we continue to call them Y,
A, X and L – BUT REMEMBER that they are functions of Y
 When we work with growth, we will often be interested in taking the first
derivative of a variable with respect to time.

• This derivative tells us how the variable, A, changes as time increases by one unit (eg. as
one year passes in this case)

To keep our expressions concise, we can use alternative notation

So whenever there is an a variable with a dot, it is

referring to the derivative of the variable with
respect to time

This expression shows us the change in GDP/capita, as one year goes by ( dy / dt ) divided by
the initial GDP/capita which allows us to get a growth rate

How to manipulate to get an expression for

- Beta and -beta has been taken down from X and L

This expression must hold in any period

- While variables will change overtime, this relationship must remain the same
- Therefore, if the left hand side changes overtime, then the right hand side must also
change

The change in log y overtime can be calculated by taking the first derivative with respect to t
as we are looking at the change overtime. Therefore, it is d log y divided by dt

As the right hand side has to equal the left hand side, we do the same process and we take
the derivative of those variables with respect to time as well.
To conclude how it is done:

1. Transformed the initial equation by taking logs to both sides

2. Change the equation by taking the derivative of one side
3. Then apply it to the other side

- Same as what we have covered, but for different variables

Taking the derivative of log y with respect to y gives us 1 / y using differentiation rules.
- Same applied for d log A and the other variables

Once we replace d log A / dA with 1/ A and multiply it by the cofactors (such as A dot, X
dot…) we have obtained the expression we want:

- We have simplified the equation by calculating the derivatives of the variables

• We wanted an expression for the growth rate, which is given by Y dot / Y

• This is obtained by taking logs of both sides, derive them with respect with time using
chain rules and then using differentiation rules, format it into this equation

• This expression tells us the growth rate will be affected by these variables
- The growth rate of A, X and L
 • g is notating the growth rate of GDP
• A is showing the technological progress (growth rate of technology)

• X dot / X is the growth rate of land, it is assumed to be 0 as there is a fixed amount of

land on Earth and therefore it cannot grow

• L dot / L is the growth rate of the labour force and shown by n

The equation tells us that technological progress is good

- The higher the value of A, the higher the value of g will be

However, population growth will have a negative effect

- The higher the value of n, the smaller the value of g
- As stated previously, increasing the population within a fixed amount of land means
each additional worker will increase total GDP by a smaller and smaller proportion and
therefore the average that is shared amongst them decreases as the population
increases.

Technological Progress

- In the 16th century, people worked in the land using simple tools and their hands
- There was a big improvement in the 19th century where machines were used to harvest
wheat and work the lands – assumed they can now produce more
- Now, only one machine is needed

However, gA is much more than just that

The discovery of fire

- Allowed us to cook our food and gain more nutrients as humans

The discovery of agriculture

- Able to use the land for more than just hunting and gathering
Early writing
- Economy works more efficiently if you can write contracts and keep a record of how
much you’re making and paying people

Technological progress should therefore be viewed in a much more broad sense than just
the invention of modern technology and machinery

We learn that technological progress is the only engine of growth in a traditional economy
- Population growth does not lead to g increasing, only an increase in A does that

Can we explain why there was no growth before the 18th century?

It makes sense that this happened because:

- This meant the technological progress was always offset by the population growth
- Explains why the GDP/capita and income of society stayed the same despite massive
advances in technology – eg. 18th century England was much more densely populated
than Babylon which is why they weren’t richer

- However, we have to consider why these two parts are equal in the different eras
- Is it due to an economic reason or by coincidence?

n in this equation is treated as exogenous

- It is just a number we feed into the model
We need to consider than n will depend on other variable in the model
- Eg. a higher GDP may mean a happier population with higher income will lead to people
having larger families and more children compared to when the GDP is low and people
cannot afford as many children. This all will then have an impact on the population
growth rate

We want to make n endogenous

- That is depending on other variables in the model

Conclusions