INTRODUCTION TO MODERN ECONOMIC GROWTH 13.5. Taking stock 598 13.6. References and Literature 600 13. 7. Exercises Chapter 14. Models of Competitive Innovations 609 14.1. The Baseline Model of Competitive Innovations 610 14.2. A One-Sector Schumpeterian growth Model 14.3. Step-by-Step Innovati 629 14.4. Taking Stock 645 14,5. References and literature 646 14. 6. Exercises 647 Chapter 15. Directed Technological Change 655 15.1. Importance of Biased Technological Change 656 15,2. Basics and definitions 660 15.3. Baseline Model of Directed Technological Change 663 15.4. Directed Technological Change with Knowledge Spillovers 15.5. Directed Technological Change without Scale Effects 686 15.6. Endogenous Labor-Augmenting Technological Change 688 15.7. Other Applications 692 5. 8. Taking stock 693 15.9. References and Literature 15.10. Exercises 698 Part 5. Stochastic growth 705 Chapter 16. Stochastic Dynamic Programming 707 Chapter 17. Neoclassical Growth Under Uncertainty 709 17.1 The brock-Mirman model 709 17. 2. Equilibrium Growth under Uncertainty 710 17.3. Application: Real Business Cycle Models 710 Chapter 18. Growth with Incomplete Market 18. 1. The Bewley-Aiyagari Model 711 18.2. Risk Diversification and growth 711 18.3. Taking Stock 711 18.4. References and Literature 711 18.5. Exercises Part 6. Technology Diffusion, Trade and Interdependences 713 Chapter 19. Diffusion of Technology 715 19. 1. Importance of Technology Adoption and Diffusion 715
Introduction to Modern Economic Growth 13.5. Taking Stock 598 13.6. References and Literature 600 13.7. Exercises 601 Chapter 14. Models of Competitive Innovations 609 14.1. The Baseline Model of Competitive Innovations 610 14.2. A One-Sector Schumpeterian Growth Model 623 14.3. Step-by-Step Innovations* 629 14.4. Taking Stock 645 14.5. References and Literature 646 14.6. Exercises 647 Chapter 15. Directed Technological Change 655 15.1. Importance of Biased Technological Change 656 15.2. Basics and Definitions 660 15.3. Baseline Model of Directed Technological Change 663 15.4. Directed Technological Change with Knowledge Spillovers 681 15.5. Directed Technological Change without Scale Effects 686 15.6. Endogenous Labor-Augmenting Technological Change 688 15.7. Other Applications 692 15.8. Taking Stock 693 15.9. References and Literature 694 15.10. Exercises 698 Part 5. Stochastic Growth 705 Chapter 16. Stochastic Dynamic Programming 707 Chapter 17. Neoclassical Growth Under Uncertainty 709 17.1. The Brock-Mirman Model 709 17.2. Equilibrium Growth under Uncertainty 710 17.3. Application: Real Business Cycle Models 710 Chapter 18. Growth with Incomplete Markets 711 18.1. The Bewley-Aiyagari Model 711 18.2. Risk, Diversification and Growth 711 18.3. Taking Stock 711 18.4. References and Literature 711 18.5. Exercises 711 Part 6. Technology Diffusion, Trade and Interdependences 713 Chapter 19. Diffusion of Technology 715 19.1. Importance of Technology Adoption and Diffusion 715 vii
INTRODUCTION TO MODERN ECONOMIC GROWTH 19.2. A Benchmark Model of Technology Diffusion 715 19.3. Human Capital and Technology 715 Chapter 20. Appropriate Technology and Productivity Differences 717 20.1. Inappropriate Technologies 717 20.2. Endogenous Technological Change and Appropriate Technology 71 20.3. Exercises Chapter 21. Trade, Technology and Interdependences 21.1. Trade and Technology Diffusion 725 21.2. Trade, Specialization and the World Income Distribution 21.3. Trade, Factor Price Equalization and Economic Growth 735 21. 4. Exercises 736 Part 7. Economic Development and Economic growth Chapter 22. Structural Change 739 22.1. Non-Balanced Growth 739 22.2. Learning-by-Doing and Structural Change 22.3.E 743 Chapter 23. Poverty Traps and Inequality 745 23. 1. Multiple Equilibria From Aggregate Demand Externalities 745 23.2. Human Capital Accumulation with Imperfect Capital Market 754 23.3. Income Inequality and Economic Development 23.4. Exercises 761 Chapter 24. Population Growth and the Demographic Transition 763 Patterns of Demographic Changes 763 24.2. Population and Growth: Different Perspectives 763 24.3. A Simple Model of Demographic Transition 763 24,4. Exercises 763 Part 8. Political Economy of Growth 765 Chapter 25. Institutions and Growth 25. 1. The Impact of Institutions on Long-Run Development 767 Chapter 26. Modeling Non-Growth Enhancing Institutions 78 26.2. Technology Adoption and Holdup 795 263. Inefficient Economic institutions 798 26.4. Exercises 802 Chapter 27. Modeling Political Institutions 111
Introduction to Modern Economic Growth 19.2. A Benchmark Model of Technology Diffusion 715 19.3. Human Capital and Technology 715 Chapter 20. Appropriate Technology and Productivity Differences 717 20.1. Inappropriate Technologies 717 20.2. Endogenous Technological Change and Appropriate Technology 718 20.3. Exercises 723 Chapter 21. Trade, Technology and Interdependences 725 21.1. Trade and Technology Diffusion 725 21.2. Trade, Specialization and the World Income Distribution 728 21.3. Trade, Factor Price Equalization and Economic Growth 735 21.4. Exercises 736 Part 7. Economic Development and Economic Growth 737 Chapter 22. Structural Change 739 22.1. Non-Balanced Growth 739 22.2. Learning-by-Doing and Structural Change 739 22.3. Exercises 743 Chapter 23. Poverty Traps and Inequality 745 23.1. Multiple Equilibria From Aggregate Demand Externalities 745 23.2. Human Capital Accumulation with Imperfect Capital Markets 754 23.3. Income Inequality and Economic Development 761 23.4. Exercises 761 Chapter 24. Population Growth and the Demographic Transition 763 24.1. Patterns of Demographic Changes 763 24.2. Population and Growth: Different Perspectives 763 24.3. A Simple Model of Demographic Transition 763 24.4. Exercises 763 Part 8. Political Economy of Growth 765 Chapter 25. Institutions and Growth 767 25.1. The Impact of Institutions on Long-Run Development 767 Chapter 26. Modeling Non-Growth Enhancing Institutions 777 26.1. Baseline Model 781 26.2. Technology Adoption and Holdup 795 26.3. Inefficient Economic Institutions 798 26.4. Exercises 802 Chapter 27. Modeling Political Institutions 803 viii
INTRODUCTION TO MODERN ECONOMIC GROWTH 27. 1. Understanding Endogenous Political Change 803 27.2. Exercises 815 Part 9. Conclusions 817 Chapter 28. Putting It All Together: Mechanics and Causes of Economic Growth 819 Chapter 29. Areas of Future Research 821 Part 10. Mathematical Al Chapter 30. Review of Basic Set Theory 825 Open, Closed, Cor nd Compact Sets 825 30.2. Sequences, Subsequences and Limits 303. Distance Norms and metrics 825 Chapter 31. Functions of Several Variables 827 31. 1. Continuous functions 31.2. Convexity, Concavity, Quasi-Concavity 827 31.3. Taylor Series 827 31.4. Optima and Constrained Optima 31.5. Intermediate and Mean Value Theorems 31.6. Inverse and Implicit Function Theorems Chapter 32. Review of Ordinary Differential Equations 32.1. Review of Complex Numbers 32. 2. Eigenvalues and Eigenvectors 829 32.3. Linear Differential Equations 829 32.4. Separable Differential Equations 32.5. Existence and Uniqueness Theorems
Introduction to Modern Economic Growth 27.1. Understanding Endogenous Political Change 803 27.2. Exercises 815 Part 9. Conclusions 817 Chapter 28. Putting It All Together: Mechanics and Causes of Economic Growth 819 Chapter 29. Areas of Future Research 821 Part 10. Mathematical Appendix 823 Chapter 30. Review of Basic Set Theory 825 30.1. Open, Closed, Convex and Compact Sets 825 30.2. Sequences, Subsequences and Limits 825 30.3. Distance, Norms and Metrics 825 Chapter 31. Functions of Several Variables 827 31.1. Continuous Functions 827 31.2. Convexity, Concavity, Quasi-Concavity 827 31.3. Taylor Series 827 31.4. Optima and Constrained Optima 827 31.5. Intermediate and Mean Value Theorems 827 31.6. Inverse and Implicit Function Theorems 827 Chapter 32. Review of Ordinary Differential Equations 829 32.1. Review of Complex Numbers 829 32.2. Eigenvalues and Eigenvectors 829 32.3. Linear Differential Equations 829 32.4. Separable Differential Equations 829 32.5. Existence and Uniqueness Theorems 829 ix
Preface This book is intended to serve two purposes (1) First and foremost, this is a book about economic growth and long-run economic development. The process of economic growth and the sources of differences in economic performance across nations are some of the most interesting, important and challenging areas in modern social science. The primary purpose of this book is to introduce graduate students to these major questions and to the theoretical tools necessary for studying them The book therefore strives to provide students with a strong background in dynamic economic analysis, since only such a background will enable a serious study of economic growth and economic development. It also tries to provide a clear discussion of the broad empirical patterns and historical processes underlying the current state of the world economy. This is moti- vated by my belief that to understand why some countries grow and some fail to do so, economists have to move beyond the mechanics of models and pose questions about the fundamental causes of economic growth (2)In a somewhat different capacity, this book is also a graduate-level intro- duction to modern macroeconomics and dynamic economic analysis. It is sometimes commented that, unlike basic microeconomic theory there is no core of current macroeconomic theory that is shared by all economists. This is not entirely true. While there is disagreement among macroeconomists about how to approach short-run macroeconomic phenomena and what the boundaries of macroeconomics should be, there is broad agreement about the workhorse models of dynamic macroeconomic analysis. These include the Solow growth model, the neoclassical growth model, the overlapping- generations model and models of technological change and technology adop- tion. Since these are all models of economic growth, a thorough treatment of modern economic growth can also provide(and perhaps should provide an introduction to this core material of modern macroeconomics. Although there are several good graduate-level macroeconomic textbooks, they typ- develop the links between modern macroeconomic analysis and economic dynamics on the one hand and general equilibrium theory on the other
Preface This book is intended to serve two purposes: (1) First and foremost, this is a book about economic growth and long-run economic development. The process of economic growth and the sources of differences in economic performance across nations are some of the most interesting, important and challenging areas in modern social science. The primary purpose of this book is to introduce graduate students to these major questions and to the theoretical tools necessary for studying them. The book therefore strives to provide students with a strong background in dynamic economic analysis, since only such a background will enable a serious study of economic growth and economic development. It also tries to provide a clear discussion of the broad empirical patterns and historical processes underlying the current state of the world economy. This is motivated by my belief that to understand why some countries grow and some fail to do so, economists have to move beyond the mechanics of models and pose questions about the fundamental causes of economic growth. (2) In a somewhat different capacity, this book is also a graduate-level introduction to modern macroeconomics and dynamic economic analysis. It is sometimes commented that, unlike basic microeconomic theory, there is no core of current macroeconomic theory that is shared by all economists. This is not entirely true. While there is disagreement among macroeconomists about how to approach short-run macroeconomic phenomena and what the boundaries of macroeconomics should be, there is broad agreement about the workhorse models of dynamic macroeconomic analysis. These include the Solow growth model, the neoclassical growth model, the overlappinggenerations model and models of technological change and technology adoption. Since these are all models of economic growth, a thorough treatment of modern economic growth can also provide (and perhaps should provide) an introduction to this core material of modern macroeconomics. Although there are several good graduate-level macroeconomic textbooks, they typically spend relatively little time on the basic core material and do not develop the links between modern macroeconomic analysis and economic dynamics on the one hand and general equilibrium theory on the other. xi
INTRODUCTION TO MODERN ECONOMIC GROWTH contrast, the current book does not cover any of the short-run top- ics in macroeconomics, but provides a thorough and rigorous introduction to what i view to be the core of macroeconomics Therefore. the second purpose of the book is to provide a first graduate-level course in modern macroeconomics The topic selection is designed to strike a balance between the two purposes of the book. Chapters 1, 3 and 4 introduce many of the salient features of the process of economic growth and the sources of cross-country differences in economic performance. Even though these chapters cannot do justice to the large literature on economic growth empirics, they provide a sufficient background for students to appreciate the set of issues that are central to the study of economic growth and also a platform for a further study of this large literature t Chapters 5-7 provide the conceptual and mathematical foundations of modern acroeconomic analysis. Chapter 5 provides the microfoundations for much of the rest of the book(and for much of modern macroeconomics), while Chapters 6 and 7 provide a quick but relatively rigorous introduction to dynamic optimization Most books on macroeconomics or economic growth use either continuous time or discrete time exclusively i believe that a serious study of both economic growth and modern macroeconomics requires the student (and the researcher) to be able to go between discrete and continuous time and choose whichever one is more convenient or appropriate for the set of questions at hand. Therefore, I have deviated from this standard practice and included both continuous time and discrete time material throughout the book. Chapters 2, 8, 9 and 10 introduce the basic workhorse models of modern macro- conomics and traditional economic growth, while Chapter 11 presents the first gen- eration models of sustained(endogenous) economic growth. Chapters 12-15 cover models of technological progress, which are an essential part of any modern economic Chapter 16 generalizes the tools introduced in Chapter 6 to stochastic envi- ronments. Using these tools, Chapter 17 presents the canonical stochastic growth model, which is the foundation of much of modern macroeconomics(though it is often left out of economic growth courses). This chapter also includes a discus- sion of the canonical Real Business Cycle model. Chapter 18 covers another major workhorse model of modern macroeconomics, the neoclassical growth model with incomplete markets. As well as the famous Bewley-Aiyagari model, this chapter dis- cusses a number of other approaches to modeling the interaction between incomplete markets and economic growth Chapters 19-24 cover a range of topics that are sometimes left out of economic growth textbooks. These include models of technology adoption, technology diffu- sion, appropriate technology, interaction between international trade and technol ogy, structural change, poverty traps, inequality, and population growth. These
Introduction to Modern Economic Growth In contrast, the current book does not cover any of the short-run topics in macroeconomics, but provides a thorough and rigorous introduction to what I view to be the core of macroeconomics. Therefore, the second purpose of the book is to provide a first graduate-level course in modern macroeconomics. The topic selection is designed to strike a balance between the two purposes of the book. Chapters 1, 3 and 4 introduce many of the salient features of the process of economic growth and the sources of cross-country differences in economic performance. Even though these chapters cannot do justice to the large literature on economic growth empirics, they provide a sufficient background for students to appreciate the set of issues that are central to the study of economic growth and also a platform for a further study of this large literature. Chapters 5-7 provide the conceptual and mathematical foundations of modern macroeconomic analysis. Chapter 5 provides the microfoundations for much of the rest of the book (and for much of modern macroeconomics), while Chapters 6 and 7 provide a quick but relatively rigorous introduction to dynamic optimization. Most books on macroeconomics or economic growth use either continuous time or discrete time exclusively. I believe that a serious study of both economic growth and modern macroeconomics requires the student (and the researcher) to be able to go between discrete and continuous time and choose whichever one is more convenient or appropriate for the set of questions at hand. Therefore, I have deviated from this standard practice and included both continuous time and discrete time material throughout the book. Chapters 2, 8, 9 and 10 introduce the basic workhorse models of modern macroeconomics and traditional economic growth, while Chapter 11 presents the first generation models of sustained (endogenous) economic growth. Chapters 12-15 cover models of technological progress, which are an essential part of any modern economic growth course. Chapter 16 generalizes the tools introduced in Chapter 6 to stochastic environments. Using these tools, Chapter 17 presents the canonical stochastic growth model, which is the foundation of much of modern macroeconomics (though it is often left out of economic growth courses). This chapter also includes a discussion of the canonical Real Business Cycle model. Chapter 18 covers another major workhorse model of modern macroeconomics, the neoclassical growth model with incomplete markets. As well as the famous Bewley-Aiyagari model, this chapter discusses a number of other approaches to modeling the interaction between incomplete markets and economic growth. Chapters 19-24 cover a range of topics that are sometimes left out of economic growth textbooks. These include models of technology adoption, technology diffusion, appropriate technology, interaction between international trade and technology, structural change, poverty traps, inequality, and population growth. These xii