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The Solow growth model

The Solow growth model. k α. Production per worker. Depreciation. δ k. Stationary state. Gross investment per worker. sk α. k. Convergence: Graphical approach. Testing for convergence graphically: Put initial level on horizontal axis (here, income per capita)

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The Solow growth model

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  1. The Solow growth model kα Production per worker Depreciation δk Stationary state Gross investment per worker skα k

  2. Convergence: Graphical approach Testing for convergence graphically: Put initial level on horizontal axis (here, income per capita) Put average growth rate over subsequent period on vertical axis Convergence implies negative slope, divergence positive slope

  3. Testing for convergence in a growth equation Absolute convergence: typically, no… but Conditional convergence: typically yes

  4. Total Factor Productivity Growth & the East Asian Miracle Growth-accounting equation

  5. Measuring openness Crude measure: (X + M)/GDP, biased by country size etc Residual measure (Leamer) The Sachs-Warner (1995) measure of country openness A country is «closed» if any of the following 5 criteria is met: Average tariff above 40% Coverage ratio of non-tariff barriers (quotas, prohibitions etc.) above 40% Black-market premium on foreign exchange above 20% for a decade in a row Export monopoly (typically on a commodity export like cocoa, coffee) Socialist economy

  6. Sachs-Warner classic result Significantly higher growth performance for open economies

  7. Rodriguez-Rodrik critique But… Rodriguez/Rodrik critique suggests it’s not trade policy that did the trick

  8. How cross-sectional data can obfuscate causal links Data Representation Time averages “Panel”

  9. Wacziarg-Welsh 2008: Using panel data Wacziarg-Welsh use factual information about trade-policy changes

  10. Panel Results are robust

  11. Wacziarg Welsh: growth before & after liberlization

  12. Explaining the growth acceleration: Investment

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