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ECON*2100 Week 2 – Lecture 1

ECON*2100 Week 2 – Lecture 1. Models of Economic Growth: Smith & The Classics. What do we mean by growth?. Extensive growth: output only grows because inputs grow Output keeps up with population Intensive growth: output grows faster than inputs Per capita income rises

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ECON*2100 Week 2 – Lecture 1

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  1. ECON*2100Week 2 – Lecture 1 Models of Economic Growth: Smith & The Classics

  2. What do we mean by growth? • Extensive growth: output only grows because inputs grow • Output keeps up with population • Intensive growth: output grows faster than inputs • Per capita income rises • This requires output per worker to rise

  3. Output per worker • Maddison p. 13: (UK, USA, Japan)

  4. Maddison: Basis of European Expansion 1000-1820 • Rise of scientific outlook • Supported by technological innovation in book publishing • Rise of trading centres • Supported by institutional developments that made contracts and account-keeping possible • Adoption of Family Law based on Christian rules • Promoted monogamy and inheritance, leading to buildup of wealth and decline of clan/tribal loyalty • Rise of nation states • Supported by technological progress in shipping

  5. 1700’s: Theories of Growth • Mercantilist • Growth comes through industrial exports, government should promote these activities • Physiocrats • Growth derives from agriculture alone • Government is a sterile entity in the economy • Smith • Voluntary exchange leads to specialization, which leads to growth

  6. How do economies grow? • Adam Smith, 1776: Specialization and Division of Labour • A workman not educated to [pin-making] could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But…one man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head… to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations… all performed by distinct hands…I have seen a small manufactory of this kind where ten men only were employed…[they] could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. • It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.

  7. How do economies grow? Specialization and exchange http://www.youtube.com/watch?v=e0H7r_Dl1CQ

  8. Specialization Output F – Food; C – Clothing; M – Manufactures 1200 Units F C M No Specialization: Everyone produces 1 of each, Total= 1 unit per capita Advanced Specialization: 4 units per capita Basic Specialization: 2 units per capita 6 Units F C M 3 Units F C M Person 1 1 2 3 1 2 3 Person 2 Person 3

  9. Specialization Output F – Food; C – Clothing; M – Manufactures 1200 Units F C M Basic Specialization: Everyone produces 2 units of 1 thing, Total= 2 units per capita No Specialization: Everyone produces 1 of each, Total= 1 unit per capita Advanced Specialization: 4 units per capita 6 Units F C M 3 Units F C M Person 1 1 2 3 1 2 3 Person 2 Person 3

  10. Specialization Output F – Food; C – Clothing; M – Manufactures 1200 Units F C M Basic Specialization: Everyone produces 2 units of 1 thing, Total= 2 units per capita Advanced Specialization: Each task broken down into 4 steps, Output goes up exponentially, Total= 100 units per capita No Specialization: Everyone produces 1 of each, Total= 1 unit per capita 6 Units F C M 3 Units F C M Person 1 1 2 3 1 2 3 Person 2 Person 3

  11. Malthus: Yes, but… • Population growth always exceeds agricultural productivity growth • Hence starvation and subsistence is unavoidable Population growth rate ZPG point 0 Income per capita

  12. Classical Model • Based on Malthus Y = f(L,N) • Diminishing returns to labour Labour Land (fixed)

  13. Classical Model • Output per Worker (Y/L) is called ‘g’ • At subsistence level, call it gz • Subsistence output = gzL

  14. Classical Model • Output per Worker (Y/L) is called ‘g’ • At subsistence level, call it gz • Subsistence output = gzL Y=gzL Output Y Labour L Leq

  15. Summary • Prior to Smith, theories of economic growth weren’t very sensible (though they still get around) • Smith: specialization and trade are key to economic growth • Malthus: Yes, but we’re doomed to starvation and subsistence anyway • Classicals: Diminishing returns to labour means a fixed labour supply at subsistence wages

  16. Next • Solow growth model

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