Introduction to modern Economic growth Daron acemoglu Department of economics, Massachusetts Institute of Technology
Introduction to Modern Economic Growth Daron Acemoglu Department of Economics, Massachusetts Institute of Technology
ntents Preface Part 1. Introduction Chapter 1. Economic Growth and Economic Development The Questions 3 1. 1. Cross-Country Income Differences 3 1.2. Income and welfare 1.3. Economic growth and Income differences 1.4. Origins of Today 's Income Differences and World Economic Growth 14 1.5. Conditional Convergence 1. 6. Correlates of economic growth 1.7. From Correlates to Fundamental Causes 1.8. The Agenda 19. References and literature Chapter 2. The Solow Growth Model 2.1. The Economic Environment of the basic Solow model 2.2. The Solow Model in Discrete Time 2.3. Transitional Dynamics in the Discrete Time Solow Model 927886 2.4. The Solow Model in Continuous Time 2.5. Transitional Dynamics in the Continuous Time Solow Model 71 2.6. Solow Model with Technological Progress 2.7. Comparative dynamics ng 2.9. References and Literature 2.10. Exercises Chapter 3. The Solow Model and the Data 103 1. Growth Accounting 3.2. Solow Model and Regression Analyses 107 3.3. The Solow Model with Human Capital 117 3.4. Solow Model and Cross-Country Income Differences: Regression 3.5. Calibrating Productivity Differences 135
Contents Preface xi Part 1. Introduction 1 Chapter 1. Economic Growth and Economic Development: The Questions 3 1.1. Cross-Country Income Differences 3 1.2. Income and Welfare 8 1.3. Economic Growth and Income Differences 11 1.4. Origins of Today’s Income Differences and World Economic Growth 14 1.5. Conditional Convergence 18 1.6. Correlates of Economic Growth 23 1.7. From Correlates to Fundamental Causes 26 1.8. The Agenda 29 1.9. References and Literature 32 Chapter 2. The Solow Growth Model 37 2.1. The Economic Environment of the Basic Solow Model 38 2.2. The Solow Model in Discrete Time 48 2.3. Transitional Dynamics in the Discrete Time Solow Model 61 2.4. The Solow Model in Continuous Time 66 2.5. Transitional Dynamics in the Continuous Time Solow Model 71 2.6. Solow Model with Technological Progress 79 2.7. Comparative Dynamics 91 2.8. Taking Stock 93 2.9. References and Literature 95 2.10. Exercises 96 Chapter 3. The Solow Model and the Data 103 3.1. Growth Accounting 103 3.2. Solow Model and Regression Analyses 107 3.3. The Solow Model with Human Capital 117 3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 124 3.5. Calibrating Productivity Differences 135 iii
INTRODUCTION TO MODERN ECONOMIC GROWTH 3.6. Estimating Productivity differences 141 3.7. Taking Stock 148 3. 8. References and Literature 150 3.9. Exercises Chapter 4. Fundamental Determinants of Differences in Economic Perfor 15 4.1. Proximate versus Fundamental causes 155 4. 2. Economies of Scale, Population, Technology and World Growth 160 4.3. The Four Fundamental causes 4. 4. The effect of Institutions on Economic growth 4.5. What Types of Institutions? 199 4.6. Disease and Development 202 4.7. Political Economy of Institutions: First Thoughts 205 king stock 206 4.9. References and Literature 207 4.10. Exercises 211 Part 2. Towards Neoclassical growth 213 Chapter 5. Foundations of Neoclassical Growth 215 5.1. Preliminaries 215 5.2. The Representative Household 218 5.3. Infinite Planning horizon 226 5. 4. The Representative Firm 229 5.5. Problem formulation 5.6. Welfare Theorems 233 5.7. Sequential Trading 241 5.8. Optimal Growth in Discrete Time 24 5.9. Optimal Growth in Continuous Time 246 5.10. Taking Stock 5.11. References and literature 248 5. 12. Exercises 250 Chapter 6. Dynamic Programming and Optimal Growth 255 6. 1. Brief Review of Dynamic Programming 256 6.2. Dynamic Programming Theorems 260 6.3. The Contraction Mapping Theorem and Applications 266 6.4. Proofs of the Main Dynamic Programming Theorems* 272 6.5. Fundamentals of Dynamic Programming 280 6.6. Optimal Growth in Discrete Time 7. Competitive Equilibrium Growth 6.8. Another Application of Dynamic Programming: Search for Ideas 299
Introduction to Modern Economic Growth 3.6. Estimating Productivity Differences 141 3.7. Taking Stock 148 3.8. References and Literature 150 3.9. Exercises 151 Chapter 4. Fundamental Determinants of Differences in Economic Performance 155 4.1. Proximate Versus Fundamental Causes 155 4.2. Economies of Scale, Population, Technology and World Growth 160 4.3. The Four Fundamental Causes 163 4.4. The Effect of Institutions on Economic Growth 177 4.5. What Types of Institutions? 199 4.6. Disease and Development 202 4.7. Political Economy of Institutions: First Thoughts 205 4.8. Taking Stock 206 4.9. References and Literature 207 4.10. Exercises 211 Part 2. Towards Neoclassical Growth 213 Chapter 5. Foundations of Neoclassical Growth 215 5.1. Preliminaries 215 5.2. The Representative Household 218 5.3. Infinite Planning Horizon 226 5.4. The Representative Firm 229 5.5. Problem Formulation 232 5.6. Welfare Theorems 233 5.7. Sequential Trading 241 5.8. Optimal Growth in Discrete Time 245 5.9. Optimal Growth in Continuous Time 246 5.10. Taking Stock 247 5.11. References and Literature 248 5.12. Exercises 250 Chapter 6. Dynamic Programming and Optimal Growth 255 6.1. Brief Review of Dynamic Programming 256 6.2. Dynamic Programming Theorems 260 6.3. The Contraction Mapping Theorem and Applications* 266 6.4. Proofs of the Main Dynamic Programming Theorems* 272 6.5. Fundamentals of Dynamic Programming 280 6.6. Optimal Growth in Discrete Time 291 6.7. Competitive Equilibrium Growth 297 6.8. Another Application of Dynamic Programming: Search for Ideas 299 iv
INTRODUCTION TO MODERN ECONOMIC GROWTH 6.9. Taking Stock 305 10. References and Literature 306 6.11. Exercises 307 Chapter 7. Review of the Theory of Optimal Control 313 7. 1. Variational Arguments 314 7. 2. The Maximum Principle: A First Look 7.3. Infinite-Horizon Optimal Control 330 7.4. More on Transversality Conditions 342 7.5. Discounted Infinite-Horizon Optimal Control 345 7.6. A First Look at Optimal Growth in Continuous Time 351 7.7. The q-Theory of Investment 352 7.8. Taking Stock 359 7. 9. References and Literature 361 710. Exercises 363 Part 3. Neoclassical Growth Chapter8. The Neoclassical Growth Model 373 8. 1. Preferences, Technology and Demographics 373 8.2. Characterization of Equilibrium 378 8.3. Optimal Growth 8.4. Steady-State Equilibrium 384 8.5. Transitional dynamics 387 8.6. Technological Change and the Canonical Neoclassical Model 390 8.7. Comparative dynamics 398 8.8. The Role of Policy 400 8.9. A Quantitative Evaluation 402 8.10. Extensions 405 8. 11. Taking Stock 406 8. 12. References and Literature 407 8. 13. Exercises 408 Chapter 9. Growth with Overlapping generations 9. 1. Problems of Infinity 418 9.2. The Baseline Overlapping Generations Model 421 9.3. The Canonical Overlapping Generations Model 9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 9.5. Role of Social Security in Capital Accumulation 433 9.6. Overlapping Generations with Impure Altruism 436 9.7. Overlapping Generations with Perpetual Youth 9.8. Overlapping Generations in Continuous Time 445
Introduction to Modern Economic Growth 6.9. Taking Stock 305 6.10. References and Literature 306 6.11. Exercises 307 Chapter 7. Review of the Theory of Optimal Control 313 7.1. Variational Arguments 314 7.2. The Maximum Principle: A First Look 324 7.3. Infinite-Horizon Optimal Control 330 7.4. More on Transversality Conditions 342 7.5. Discounted Infinite-Horizon Optimal Control 345 7.6. A First Look at Optimal Growth in Continuous Time 351 7.7. The q-Theory of Investment 352 7.8. Taking Stock 359 7.9. References and Literature 361 7.10. Exercises 363 Part 3. Neoclassical Growth 371 Chapter 8. The Neoclassical Growth Model 373 8.1. Preferences, Technology and Demographics 373 8.2. Characterization of Equilibrium 378 8.3. Optimal Growth 383 8.4. Steady-State Equilibrium 384 8.5. Transitional Dynamics 387 8.6. Technological Change and the Canonical Neoclassical Model 390 8.7. Comparative Dynamics 398 8.8. The Role of Policy 400 8.9. A Quantitative Evaluation 402 8.10. Extensions 405 8.11. Taking Stock 406 8.12. References and Literature 407 8.13. Exercises 408 Chapter 9. Growth with Overlapping Generations 417 9.1. Problems of Infinity 418 9.2. The Baseline Overlapping Generations Model 421 9.3. The Canonical Overlapping Generations Model 427 9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 429 9.5. Role of Social Security in Capital Accumulation 433 9.6. Overlapping Generations with Impure Altruism 436 9.7. Overlapping Generations with Perpetual Youth 441 9.8. Overlapping Generations in Continuous Time 445 v
INTRODUCTION TO MODERN ECONOMIC GROWTH 9.9. Taking Stock 453 9.10. References and Literature 9.11. Exercises 456 Chapter 10. Human Capital and Economic Growth 463 10. 1. A Simple Separation Theorem 463 10.2. Schooling Investments and Returns to Education 466 103. The ben porath model 469 10.4. Neoclassical Growth with Physical and Human Capital 474 10.5. Capital-Skill Complementarity in an Overlapping Generations Model 480 10.6. Physical and Human Capital with Imperfect Labor Markets 0.7. Human Capital Externalities 492 10.8. Nelson-Phelps Model of Human Capital 495 10.9. Taking stock 498 10.10. References and Literature 500 10.11. Exercises 502 Chapter 11. First-Generation Models of Endogenous Growth 505 11. 1. The aK Model revisited 506 11.2. The AK Model with Physical and Human Capital 513 11.3. The Two-Sector AK Model 516 11.4. Growth with Externalities 521 11.5. Taking Stock 11.6. References and Literature 528 11. 7. Exercises 529 Part 4. Endogenous Technological Change 535 Chapter 12. Modeling Technological Change 2. 1. Different Conceptions of Technology 12.2. Science Profits and the Market Size 42 12.3. The Value of Innovation in Partial Equilibrium 12. 4. The Dixit-Stiglitz Model and"Aggregate Demand Externalities" 555 12.5. Individual R&d Uncertainty and the Stock Market 562 2. 6. Taking stock 12.7. References and literature 565 12.8. Exercises 567 Chapter 13. Expanding Variety Models 13. 1. The Lab equipment Model of Growth with Product Varieties 572 13. 2. Growth with Knowledge Spillovers 586 13.3. Growth without Scale effects 589 13. 4. Growth with Expanding Product Varieties
Introduction to Modern Economic Growth 9.9. Taking Stock 453 9.10. References and Literature 455 9.11. Exercises 456 Chapter 10. Human Capital and Economic Growth 463 10.1. A Simple Separation Theorem 463 10.2. Schooling Investments and Returns to Education 466 10.3. The Ben Porath Model 469 10.4. Neoclassical Growth with Physical and Human Capital 474 10.5. Capital-Skill Complementarity in an Overlapping Generations Model 480 10.6. Physical and Human Capital with Imperfect Labor Markets 485 10.7. Human Capital Externalities 492 10.8. Nelson-Phelps Model of Human Capital 495 10.9. Taking Stock 498 10.10. References and Literature 500 10.11. Exercises 502 Chapter 11. First-Generation Models of Endogenous Growth 505 11.1. The AK Model Revisited 506 11.2. The AK Model with Physical and Human Capital 513 11.3. The Two-Sector AK Model 516 11.4. Growth with Externalities 521 11.5. Taking Stock 526 11.6. References and Literature 528 11.7. Exercises 529 Part 4. Endogenous Technological Change 535 Chapter 12. Modeling Technological Change 537 12.1. Different Conceptions of Technology 537 12.2. Science, Profits and the Market Size 542 12.3. The Value of Innovation in Partial Equilibrium 545 12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 555 12.5. Individual R&D Uncertainty and the Stock Market 562 12.6. Taking Stock 564 12.7. References and Literature 565 12.8. Exercises 567 Chapter 13. Expanding Variety Models 571 13.1. The Lab Equipment Model of Growth with Product Varieties 572 13.2. Growth with Knowledge Spillovers 586 13.3. Growth without Scale Effects 589 13.4. Growth with Expanding Product Varieties 593 vi