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Chapter 4 Classical Growth Models Topic 1 Ricardian Growth The assumptions of the Ricardian growth model ² One sector: Agriculture ² Ricardian model ³ Natural resources are considered the main constraint to growth. ² Mathusian idea ³ Population expands endogenously with output. The production function ² Note: ³ Capital(K) and labor(L) are assumed to grow endogenously, while the land(D) is fixed in supply. ³ The increases in labor lead to increase in output, but it will have diminishing marginal productivity. 2 2 (,,):0,0 dYdY YfnKLDwhere dLdL=The production function Output Labor The population growth and consumption ² According to assumption 2, the population will expand until average‐consumption drops to the level of subsistence, when the output grows. ² This means the consumption/population ratio is constant, which equals to the level of subsistence.The population growth and consumption Consumption Labor The stationary state of growth The capitalists’ profit The stationary state of growth ² The capitalists’profit encourages them to accumulate and invest more. ² Then, more labor is employed. ² However, due to the diminishing marginal productivity, the extra output increasingly goes to subsistence. ² Ultimately, profits also are squeezed, so the investment ceases. ² Thus, the growth ceases at the point Z. The stationary state of growth ² The point Z is the stationary state, where the output line and the subsistence consumption line intersect. ² The growth can cease even before the stationary state, if all the profits accrues as rent to the owners of land. The impact of the technological advance Output Labor Z Z’ The implications ² In the long run, labor’s per capita consumption must revert to subsistence level. ² In other words, there must be a dismal stationary state of growth, even if technological advances take place.Can it possible to escape from the stagnation? ² Two sectors analyses ³ If there is another sector not subject to diminishing returns, can the growth escape from the stagnation? ² Open market analyses ³ If the food can be import, can the growth escape from the stagnation? Two sectors analyses ² Assume that the manufacturing sector does not subject to diminishing return, and it is of constant returns to scale. ² Food sector diminishing marginal productivity onland ² Manufacturing constant returns to sector scale Two sectors analyses ² Economic growth Population growth ² Demand of food rises Food price rises Profit infood sector squeezes ² Wage rises Profit in manufacturing sector squeezes Two sectors analyses ² Overall growth still grinds to a halt due to the diminishing marginal productivity of increasing more labor working the fixed area of land. ² The growth cannot escape from the stagnation. Open market analyses ² Assume that the food can be imported at a fixed price and there is industrial sector with constant returns to scale. ² The rising demand can be satisfied by the rising import, so that the food price does not rise. Open market analyses ² Economic growth Population growth ² Demand of food rises Food price rises ² Import of food rises Food price is constant. Profit infood sector squeezes ² Wage does rise Profit in manufacturing sector doessqueeze Investment in manufacturing sector will not cease.Open market analyses ² The industrial sector may expand, therefore, the growth can escape from the stagnation. Critique ² The Ricardian model applies only to the closed economies, or better yet, large economies where the influence of the rest of the world must necessarily be small. ² The Malthusian mechanism may not apply to the modern economic growth. ² The agricultural productivity can grow at a faster rate than population growth. Critique ² The technical progress cannot exceed the pace of population expansion in the long run. ³ The expansion of markets allowed more specialization and economies of scale ³ The increased specialization can provide a slow but steady source of improvement. ³ Irregular spurts of scientific and technical advance. Topic 2 The Lewis Model The assumptions of the Lewis model ² Dual economy‐‐Two sectors ² Agricultural sector: Limited land causes diminishing marginal product. ² Capitalist sector: Accumulated capital to allow unlimited growth. ³ Industrial sector: It does not suffer from diminishing returns. The assumptions of the Lewis model ² Surplus labor ² Most LDCs have a conspicuous reserve army of the underunemployed that can be put to work in a dynamic new sector to generate growth. ² Underunemployed: is defined more precisely as a low marginal product of labor. ³ MPL is lower than the constant institutional wage,.Agricultural sector: labor market ² WA is termed subsistence wage, or constant institutional wage. ² All those whose wage exceeds marginal product are surplus labor. Industrial sector: labor market ² The wage in industrial sector i
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