Lecture 7: Economic Growth

Source: A Farewell to Alms – Gregory Clark

Source: A Farewell to Alms – Gregory Clark

5. There is no tendency for rich countries to grow faster than poor countries, and vice-versa. 6. Rich countries are more alike in terms of rates of growth than are poor countries.

Malthus vs Solow

• In this chapter, we cover two models of economic growth – Malthusian model provides insight for

understanding pre-1800 growth facts in the world. – Solow model provides insight for understanding

post 1800, a world that is characterized by long run increases in the standard of living

First, let’s look at the Malthusian Model

A Malthusian Model of Economic Growth

Model predicts that a technological advance will just increase population, with no long-run change in the standard of living.

Production Function

Output is produced from land and labor inputs.

Evolution of the population

Population growth is higher the higher is per-capita consumption.

Discussion: What motivates Malthus to make this

assumption?

Population Growth Depends on Consumption per Worker

Equilibrium Condition

In equilibrium, consumption equals output produced.

Evolution of the population

How does population evolve in the Malthus world?

Now let’s analyze the steady state of the Malthus Model steady state is where there is no population growth, i.e. N = N’ = N*

Determination of the Steady State Population

• N* is the steady state population, determined by the intersection of the curve and the 45 degree line.

The per-worker production function

Now let’s analyze the model in terms of per capita variables

where =

( , ) ,1Y zF L N LzFN N N

= =

The per-worker production function

• Relationship between output per worker and land per worker in the Malthusian Model

Population Growth

Population growth is increasing in consumption per worker, c

Determination of the Steady State in the Malthusian Model

steady state where N’=N

What if more land is discovered?

more land more food more food population growth

population growth less land per worker !!!

An increase in z in the Malthusian model

• If z increases, this shifts up the per-worker production function.

• In the long run, the population increases to the point where per capita consumption returns to its initial level.

• There is no long-run change in living standards.

1 2

An increase in z in the Malthusian model

Adjustment to the Steady State when z Increases

Discussion: So if discovery of new land or advancement in technology does not lead to an improvement of living standards, what does?

Population Control in the Malthusian Model

• Population control alters the relationship between population growth and per-capita consumption.

• In the long run, per capita consumption increases, and living standards rise.

Population Control in the Malthusian Model

• Population control shifts the function g1(c) to g2(c)

• In the steady state, consumption per worker increases and land per worker increases.

Malthusian Trap

Source: A Farewell to Alms – Gregory Clark

How Useful is the Malthusian Model

• Model provides a good explanation for pre-1800 growth facts in the world.

• Malthus did not predict the effects of technological advances on fertility.

• Malthus did not understand the role of capital accumulation in growth.