H Uzawa, “Optimum Technical Change in an Aggregative Model of Economic Growth,” International Economic Review 6, no. 1 (1965): 18-31.
"In this paper we are interested in formulating a model of economic growth in which an advancement in the state of technological knowledge is achieved only be engaging scarce resources in some positive quantities, and in analyzing the pattern of the allocation of scarce resources that results in an optimum growth" (18).
Showing posts with label Economic Modeling. Show all posts
Showing posts with label Economic Modeling. Show all posts
Friday, November 14, 2008
Lucas: On the Mechanics of Development Planning
RE Lucas, “On the Mechanics of Development Planning,” Journal of Monetary Economics 22, no. 1 (1988): 3-42.
"This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing" (3).
The piece begins with a general overview of 1983 data regarding income, development and growth levels. There is clearly a large array of different levels of living standards and material improvement. Lucas exits this overview of the statistics by wondering whether or not there is something the countries with lower growth rates can do to improve their situation. "Once one starts to think about them, it is hard to think about anything else" (5). This, then, becomes the catalyst for a theory of economic development.
"Even granted its limitations, the simple neoclassical model has made basic contributions to our thinking about economic growth. Qualitatively, it emphasizes a distinction between 'growth effects'--changes in parameters that alter growth rates along balanced paths--and 'level effects--changes that raise or lower balanced growth paths without affecting their slope--that is fundamental in thinking about policy changes" (12).
"In the absence of differences in pure technology then, and under the assumption of no factor mobility, the neoclassical model predicts a strong tendency to income equality and equality in growth rates, tendencies we can observe within countries and, perhaps, within the wealthiest countries taken as a group, but which simply cannot be seen in the world at large. When factor mobility is permitted, this prediction is very powerfully reinforced. Factors of production, capital or labor or both, will flow to the highest returns, which is to say where each is relatively scarce. Capital-labor ratios will move rapidly to equality, and with them factor prices" (16).
Lucas finds that the human capital model performs as well as the Solow model. "What can be concluded from these exercise? Normatively, it seems to me, very little: The model I have just described has exactly the same ability to fit US data as does the Solow model in which equilibrium and efficient growth rates coincide" (27).
"The model I have just worked through treats the decision to accumulate human capital as equivalent to a decision to withdraw effort from production--to go to school, say. As many economists have observed, on-the-job-training or learning-by-doing appear to be at least as important as schooling in the formation of human capital. It would not be difficult to incorporate such effects into the previous model, but it is easier to think about one thing at a time so I will just set out an example of a system...in which all human capital accumulation is learning-by-doing" (27).
UPDATE:
"My aim, as I said at the beginning of these lectures, has been to try to find what I called 'mechanics' suitable for the study of economic development: that is, a system of differential equations the solution to which imitates some of the main features of the economic behavior we observe in the world economy" (39).
"The model that I think is central was developed in section 4. It is a system with a given rate of population growth but which is acted on by no other outside or exogenous forces. There are two kinds of capital...in the system:P physical capital that is accumulated and utilized in production under a familiar neoclassical technology, and human capital that enhances the productivity of both labor and physical capital , and is accumulated according to a 'law' having the crucial property that a constant level of effort produces a constant growth rate of the stock, independent of the level already attained" (39).
"A successful theory of economic development clearly needs, in the first place, mechanics that are consistent with sustained growth and with sustained diversity in income levels...But there is no one pattern of growth to which all economies conform, so a useful theory needs also to capture some forces for change in these patterns, and a mechanics that permits these forces to operate" (41).
"This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing" (3).
The piece begins with a general overview of 1983 data regarding income, development and growth levels. There is clearly a large array of different levels of living standards and material improvement. Lucas exits this overview of the statistics by wondering whether or not there is something the countries with lower growth rates can do to improve their situation. "Once one starts to think about them, it is hard to think about anything else" (5). This, then, becomes the catalyst for a theory of economic development.
"Even granted its limitations, the simple neoclassical model has made basic contributions to our thinking about economic growth. Qualitatively, it emphasizes a distinction between 'growth effects'--changes in parameters that alter growth rates along balanced paths--and 'level effects--changes that raise or lower balanced growth paths without affecting their slope--that is fundamental in thinking about policy changes" (12).
"In the absence of differences in pure technology then, and under the assumption of no factor mobility, the neoclassical model predicts a strong tendency to income equality and equality in growth rates, tendencies we can observe within countries and, perhaps, within the wealthiest countries taken as a group, but which simply cannot be seen in the world at large. When factor mobility is permitted, this prediction is very powerfully reinforced. Factors of production, capital or labor or both, will flow to the highest returns, which is to say where each is relatively scarce. Capital-labor ratios will move rapidly to equality, and with them factor prices" (16).
Lucas finds that the human capital model performs as well as the Solow model. "What can be concluded from these exercise? Normatively, it seems to me, very little: The model I have just described has exactly the same ability to fit US data as does the Solow model in which equilibrium and efficient growth rates coincide" (27).
"The model I have just worked through treats the decision to accumulate human capital as equivalent to a decision to withdraw effort from production--to go to school, say. As many economists have observed, on-the-job-training or learning-by-doing appear to be at least as important as schooling in the formation of human capital. It would not be difficult to incorporate such effects into the previous model, but it is easier to think about one thing at a time so I will just set out an example of a system...in which all human capital accumulation is learning-by-doing" (27).
UPDATE:
"My aim, as I said at the beginning of these lectures, has been to try to find what I called 'mechanics' suitable for the study of economic development: that is, a system of differential equations the solution to which imitates some of the main features of the economic behavior we observe in the world economy" (39).
"The model that I think is central was developed in section 4. It is a system with a given rate of population growth but which is acted on by no other outside or exogenous forces. There are two kinds of capital...in the system:P physical capital that is accumulated and utilized in production under a familiar neoclassical technology, and human capital that enhances the productivity of both labor and physical capital , and is accumulated according to a 'law' having the crucial property that a constant level of effort produces a constant growth rate of the stock, independent of the level already attained" (39).
"A successful theory of economic development clearly needs, in the first place, mechanics that are consistent with sustained growth and with sustained diversity in income levels...But there is no one pattern of growth to which all economies conform, so a useful theory needs also to capture some forces for change in these patterns, and a mechanics that permits these forces to operate" (41).
Romer: Endogenous Technological Change
PM Romer, “Endogenous Technological Change,” Journal of Political Economy 98, no. S5 (1990): 71.
"Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a non-rival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth" (71).
The author puts forth three premises of the article: The first is that changes in technology is the key stone of economic growth. In this sense, this Romer model closely mirrors Solow's model. "Technological change provides the incentive for continued capital accumulation, and together, capital accumulation and technological change account for much of the increase in output per hour worked" (72). The second premise is that technology improvements are brought about by people who are directly responding to market motivations. "Thus the model is one of endogenous rather than exogenous technological change. This does not mean that everyone who contributes to technological change is motivated by market incentives...The premise here is that market incentives nonetheless play an essential role in the process whereby new knowledge is translated into goods with practical value" (72). According to Romer, the most fundamental supposition is the last: this involves the creation of new "instructions" for dealing with raw materials. Once the cost of these "instructions" has been borne, the benefits continue to accumulate.
There is then an extended discussion of the distinction between rivalrous, nonrivalrous, excludable and nonexcludable goods and how they are and may be treated in economic growth models.
The model is then worked out in some detail.
"The model presented here is essentially the one-sector neoclassical model with technological change, augmented to give an endogenous explanation of the source of the technological change" (99).
"The most interesting positive implication of the model is that an economy with a larger total stock of human capital will experience faster growth" (99).
"Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a non-rival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth" (71).
The author puts forth three premises of the article: The first is that changes in technology is the key stone of economic growth. In this sense, this Romer model closely mirrors Solow's model. "Technological change provides the incentive for continued capital accumulation, and together, capital accumulation and technological change account for much of the increase in output per hour worked" (72). The second premise is that technology improvements are brought about by people who are directly responding to market motivations. "Thus the model is one of endogenous rather than exogenous technological change. This does not mean that everyone who contributes to technological change is motivated by market incentives...The premise here is that market incentives nonetheless play an essential role in the process whereby new knowledge is translated into goods with practical value" (72). According to Romer, the most fundamental supposition is the last: this involves the creation of new "instructions" for dealing with raw materials. Once the cost of these "instructions" has been borne, the benefits continue to accumulate.
There is then an extended discussion of the distinction between rivalrous, nonrivalrous, excludable and nonexcludable goods and how they are and may be treated in economic growth models.
The model is then worked out in some detail.
"The model presented here is essentially the one-sector neoclassical model with technological change, augmented to give an endogenous explanation of the source of the technological change" (99).
"The most interesting positive implication of the model is that an economy with a larger total stock of human capital will experience faster growth" (99).
Barro et al.: Convergence Across States and Regions
Robert J. Barro et al., “Convergence Across States and Regions,” in (1991: The Brookings Institution, 1991), 107-182, http://www.jstor.org/stable/2534639 .
"An important economic question is whether poor countries or regions tend to converge toward rich ones...Although some economic theories predict convergence, the empirical evidence has been a subject of debate. In this study we add to the evidence by extending our previous analysis of economic growth across the US states...The overall evidence weighs heavily in favor of convergence: both for sectors and for state aggregates, per capita income and product in poor states tend to grow faster than in rich states. The rate of convergence3 is, however, not rapid: the gap between the typical poor and rich state diminishes at roughly 2 percent a year" (107-8). This method is then applied to Europe with similar results recorded.
The origin of convergence in the neoclassical model is centered on the assumption of diminishing returns to capital. Because countries who have lower ratios of capital to labor experience these diminishing returns less acutely, they are able to grow more quickly and converge on countries with higher levels of income per capita. The further a country finds itself below the "steady-state", the more likely it is to grow relatively more quickly.
An additional great variety of factors affects convergence. For example, if there are high levels of capital mobility, the diminished capital to labor ratios in poorer countries may actually improve and the affects of diminishing returns may be more strongly felt. Additionally, greater technology transfer from more wealthy countries to more poor countries could speed up the affects of convergence.
The remainder of the paper is the statistical analysis.
"An important economic question is whether poor countries or regions tend to converge toward rich ones...Although some economic theories predict convergence, the empirical evidence has been a subject of debate. In this study we add to the evidence by extending our previous analysis of economic growth across the US states...The overall evidence weighs heavily in favor of convergence: both for sectors and for state aggregates, per capita income and product in poor states tend to grow faster than in rich states. The rate of convergence3 is, however, not rapid: the gap between the typical poor and rich state diminishes at roughly 2 percent a year" (107-8). This method is then applied to Europe with similar results recorded.
The origin of convergence in the neoclassical model is centered on the assumption of diminishing returns to capital. Because countries who have lower ratios of capital to labor experience these diminishing returns less acutely, they are able to grow more quickly and converge on countries with higher levels of income per capita. The further a country finds itself below the "steady-state", the more likely it is to grow relatively more quickly.
An additional great variety of factors affects convergence. For example, if there are high levels of capital mobility, the diminished capital to labor ratios in poorer countries may actually improve and the affects of diminishing returns may be more strongly felt. Additionally, greater technology transfer from more wealthy countries to more poor countries could speed up the affects of convergence.
The remainder of the paper is the statistical analysis.
Barro: Economic Growth in a Cross Section of Countries
RJ Barro, “Economic Growth in a Cross Section of Countries,” NBER Working Paper (1991).
"For 98 countries in the period 1960-1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school-enrollment rates) and negatively related to the initial...level of real per capital GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions" (407).
"The main element behind the convergence result in neoclassical growth models is diminishing returns to reproducible capital. Poor countries, with low ratios of capital to labor, have high marginal products of capital and thereby tend to grow at high rates. This tendency for low-income countries to grow at high rates is reinforced in extensions of the neoclassical models that allow for international mobility of capital and technology" (407).
The effects of human capital are varied, but many have posited that the rate of return increases after a certain point of investment. "As an example, the return to some kinds of ability, such as talent in communications, is higher if other people are also more able. In this setting, increases in the quantity of human capital per person tend to lead to higher rates of investment in human and physical capital, and hence, to higher per capita growth. A supporting force is that more human capital per person reduces fertility rates, because human capital is more productive in producing goods and additional human capital rather than more children" (409).
"For 98 countries in the period 1960-1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school-enrollment rates) and negatively related to the initial...level of real per capital GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions" (407).
"The main element behind the convergence result in neoclassical growth models is diminishing returns to reproducible capital. Poor countries, with low ratios of capital to labor, have high marginal products of capital and thereby tend to grow at high rates. This tendency for low-income countries to grow at high rates is reinforced in extensions of the neoclassical models that allow for international mobility of capital and technology" (407).
The effects of human capital are varied, but many have posited that the rate of return increases after a certain point of investment. "As an example, the return to some kinds of ability, such as talent in communications, is higher if other people are also more able. In this setting, increases in the quantity of human capital per person tend to lead to higher rates of investment in human and physical capital, and hence, to higher per capita growth. A supporting force is that more human capital per person reduces fertility rates, because human capital is more productive in producing goods and additional human capital rather than more children" (409).
Mankiw, Romer and Weil: A Contribution to the Empirics of Economic Growth
NG Mankiw, D Romer, and DN Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics 107, no. 2 (1992): 407-437.
"This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts" (407).
"This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two variables determine the steady-state level of income per capita. Because saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country" (407).
These authors argue that, on the whole, the Solow model gets it right: when savings are up, income is up; when population growth is up, income is down. However, they also argue that the most basic Solow model left out some important variables that help to define growth: the accumulation of both human capital and physical capital. "First, for any given rate of human capital accumulation, higher saving or lower population growth leads to a higher level of income and thus a higher level of human capital; hence, accumulation of physical capital and population growth have greater impacts on income when accumulation of human capital is taken into account. Second, human-capital accumulation may be correlated with saving rates and population growth rates; this would imply that omitting human-capital accumulation biases the estimated coefficients on saving and population growth" (408).
"It appears that the augmented Solow model provides an almost complete explanation of why some countries are rich and other countries are poor" (408).
The authors then explore the phenomena of convergence, finding that there is little evidence for this and that countries will eventually settle at different steady-states of personal income relative to the amount of physical capital, savings and human capital.
"Overall, the findings reported in this paper cast doubt on the recent trend among economists to dismiss the Solow growth model in favor of endogenous-growth models that assume constant or increasing returns to scale in capital...This conclusion does not imply, however, that the Solow model is a complete theory of growth: one would like also to understand the determinants of saving, population growth, and worldwide technological change, all of which the Solow model treats as exogenous. Nor does it imply that endogenous-growth models are not important, for they may provide the right explanation of worldwide technological change. Our conclusion does imply, whoever, that the Solow model gives the right answers to the questions it is designed to address" (409).
They then work out their equations.
"Over the past few years economists studying growth have turned increasingly to endogenous-growth models. These models are characterized by the assumption of non-decreasing returns to the set of reproducible factors of production...Among the implications of this assumption are that countries that save more grow faster indefinitely and that countries need not converge in income per capita, even if they have the same preferences and technology" (421).
They then explore the concept of convergence, and respond to critics, specifically Barro, who argues that the Solow model emphasizes a convergence of income per capita, and that this does not relate directly to the evidence. These authors claim that the Solow model does not, in fact, predict convergence, but is explicit in its analysis that different countries will reach different steady-states.
"We have suggested that international differences in income per capita are best understood using an augmented Solow growth model" (432).
"This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts" (407).
"This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two variables determine the steady-state level of income per capita. Because saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country" (407).
These authors argue that, on the whole, the Solow model gets it right: when savings are up, income is up; when population growth is up, income is down. However, they also argue that the most basic Solow model left out some important variables that help to define growth: the accumulation of both human capital and physical capital. "First, for any given rate of human capital accumulation, higher saving or lower population growth leads to a higher level of income and thus a higher level of human capital; hence, accumulation of physical capital and population growth have greater impacts on income when accumulation of human capital is taken into account. Second, human-capital accumulation may be correlated with saving rates and population growth rates; this would imply that omitting human-capital accumulation biases the estimated coefficients on saving and population growth" (408).
"It appears that the augmented Solow model provides an almost complete explanation of why some countries are rich and other countries are poor" (408).
The authors then explore the phenomena of convergence, finding that there is little evidence for this and that countries will eventually settle at different steady-states of personal income relative to the amount of physical capital, savings and human capital.
"Overall, the findings reported in this paper cast doubt on the recent trend among economists to dismiss the Solow growth model in favor of endogenous-growth models that assume constant or increasing returns to scale in capital...This conclusion does not imply, however, that the Solow model is a complete theory of growth: one would like also to understand the determinants of saving, population growth, and worldwide technological change, all of which the Solow model treats as exogenous. Nor does it imply that endogenous-growth models are not important, for they may provide the right explanation of worldwide technological change. Our conclusion does imply, whoever, that the Solow model gives the right answers to the questions it is designed to address" (409).
They then work out their equations.
"Over the past few years economists studying growth have turned increasingly to endogenous-growth models. These models are characterized by the assumption of non-decreasing returns to the set of reproducible factors of production...Among the implications of this assumption are that countries that save more grow faster indefinitely and that countries need not converge in income per capita, even if they have the same preferences and technology" (421).
They then explore the concept of convergence, and respond to critics, specifically Barro, who argues that the Solow model emphasizes a convergence of income per capita, and that this does not relate directly to the evidence. These authors claim that the Solow model does not, in fact, predict convergence, but is explicit in its analysis that different countries will reach different steady-states.
"We have suggested that international differences in income per capita are best understood using an augmented Solow growth model" (432).
Thursday, November 13, 2008
Solow: A Contribution to the Theory of Economic Growth
RM Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70, no. 1 (1956): 65-94.
Solow begins by explaining that all theory relies on sets of assumptions, and that there are different kinds of assumptions that one can make based on the degree to which they will affect the outcome of the theory. Theories that make assumptions that directly drive the outputs of the theories must clearly articulate why those assumptions were put forth. The author makes an argument about the assumptions underlying the Harrod-Domar model of economic growth.
This core assumption of the Harrod-Domar model is that of fixed proportions in production. "There is no possibility of substituting labor for capital in production" (65). This assumption leads to what Solow terms a "knife-edge" balance, where if one of the "key parameters" is thrown off slightly, than negative consequences will arise for an economic system. "A remarkable characteristic of the Harrod-Domar model is that it consistently studies long-run problems with the usual short-run tools...The bulk of this paper is devoted to a model of long-run growth which accepts all of the Harrod-Domar assumptions except that of fixed proportions. Instead I suppose that the single composite commodity is produced by labor and capital under the standard neoclassical conditions" (66).
"The basic conclusion of this analysis is that, when production takes place under the usual neoclassical conditions of variable proportions and constant returns to scale, no simple opposition between natural and warranted rates of growth is possible. There may not be--in fact in the case of the Cobb-Douglas function there never can be--any knife-edge. The system can adjust to any given rate of growth of the labor force, and eventually approach a state of steady proportional expansion" (73).
Explores examples of Harrod-Domar models, Cobb-Douglas models, and what I assume can be called Solow models of growth.
"Everything above is the neoclassical side of the coin. Most especially it is full employment economics--in the dual aspect of equilibrium condition and frictionless, competitive, causal system. All the difficulties and rigidities which go into modern Keynesian income analysis have been shunted aside. It is not my contention that these problems don't exist, nor that they are of no significance in the long run. My purpose was to examine what might be called the tightrope view of economic growth and to see where more flexible assumptions about production would lead a simple model" (91).
Solow begins by explaining that all theory relies on sets of assumptions, and that there are different kinds of assumptions that one can make based on the degree to which they will affect the outcome of the theory. Theories that make assumptions that directly drive the outputs of the theories must clearly articulate why those assumptions were put forth. The author makes an argument about the assumptions underlying the Harrod-Domar model of economic growth.
This core assumption of the Harrod-Domar model is that of fixed proportions in production. "There is no possibility of substituting labor for capital in production" (65). This assumption leads to what Solow terms a "knife-edge" balance, where if one of the "key parameters" is thrown off slightly, than negative consequences will arise for an economic system. "A remarkable characteristic of the Harrod-Domar model is that it consistently studies long-run problems with the usual short-run tools...The bulk of this paper is devoted to a model of long-run growth which accepts all of the Harrod-Domar assumptions except that of fixed proportions. Instead I suppose that the single composite commodity is produced by labor and capital under the standard neoclassical conditions" (66).
"The basic conclusion of this analysis is that, when production takes place under the usual neoclassical conditions of variable proportions and constant returns to scale, no simple opposition between natural and warranted rates of growth is possible. There may not be--in fact in the case of the Cobb-Douglas function there never can be--any knife-edge. The system can adjust to any given rate of growth of the labor force, and eventually approach a state of steady proportional expansion" (73).
Explores examples of Harrod-Domar models, Cobb-Douglas models, and what I assume can be called Solow models of growth.
"Everything above is the neoclassical side of the coin. Most especially it is full employment economics--in the dual aspect of equilibrium condition and frictionless, competitive, causal system. All the difficulties and rigidities which go into modern Keynesian income analysis have been shunted aside. It is not my contention that these problems don't exist, nor that they are of no significance in the long run. My purpose was to examine what might be called the tightrope view of economic growth and to see where more flexible assumptions about production would lead a simple model" (91).
Thursday, October 23, 2008
Abramovitz: Catching Up, Forging Ahead and Falling Behind
Abramovitz, M., 1986. Catching Up, Forging Ahead, and Falling Behind. Journal of Economic History, 46(2), 385-406.
“A widely entertained hypothesis holds that, in comparisons among countries, productivity growth rates tend to vary inversely with productivity levels” (385). Convergence happened most clearly in the quarter century following WWII. This article puts forth a hypothesis that convergence takes place because of catch-up phenomena.
The story of convergence is quite a simple one, especially after WWII: The US had amassed such a degree of technology that was not available in other countries and, once the peace was established, other nations were able to achieve the gains from that technology without having to go up the steep learning curve of an initial adopter. When you are further back in your “technological age” (which correlates to the actual age of the technology chronologically), you have more potential to catch up. As you get closer to the hegemon, this growth slows.
Four extensions to the basic idea of technological convergence are listed:
1.) “The same technological opportunity that permits rapid progress by modernization encourages rapid growth of the capital stock parly because of the returns to modernization itself…So—besides a reduction of technological age towards chronological age, the rate of rise of the capital-labor ratio tends to be higher”
2.) “Growth of productivity also makes for increase in aggregate output”
3.) “Backwardness carries an opportunity for modernization in disembodied, as well as in embodied, technology”
4.) “If countries at relatively low levels of industrialization contain large numbers of redundant workers in farming and petty trade, as is normally the case, there is also an opportunity for productivity growth by improving the allocation of labor” (387).
Countries who have the greatest opportunity to gain from technological convergence are those that are “socially advanced” but technologically backwards.
Restatement of hypothesis: “Countries that are technologically backward have a potentiality for generating growth more rapid than that of more advanced countries, providing their social capabilities are sufficiently developed to permit successful exploitation of technologies already employed by the technological leaders. The pace at which potential for catch-up is actually realized in a particular period depends on factors limiting the diffusion of knowledge, the rate of structural change, the accumulation of capital, and the expansion of demand. The process of catching up tends to be self-limiting, but the strength of the tendency may be weakened or overcome, at least for limited periods, by advantages connected with the convergence of production patterns as followers advance towards leaders or by an endogenous enlargement of social capabilities” (391).
Abramovits then explores historical data related to the phenomena of catching up.
Catching-up is a phenomena that occurs when some are behind technologically but where they have achieved sufficient social capital to make the adoption of new technologies feasible.
“A widely entertained hypothesis holds that, in comparisons among countries, productivity growth rates tend to vary inversely with productivity levels” (385). Convergence happened most clearly in the quarter century following WWII. This article puts forth a hypothesis that convergence takes place because of catch-up phenomena.
The story of convergence is quite a simple one, especially after WWII: The US had amassed such a degree of technology that was not available in other countries and, once the peace was established, other nations were able to achieve the gains from that technology without having to go up the steep learning curve of an initial adopter. When you are further back in your “technological age” (which correlates to the actual age of the technology chronologically), you have more potential to catch up. As you get closer to the hegemon, this growth slows.
Four extensions to the basic idea of technological convergence are listed:
1.) “The same technological opportunity that permits rapid progress by modernization encourages rapid growth of the capital stock parly because of the returns to modernization itself…So—besides a reduction of technological age towards chronological age, the rate of rise of the capital-labor ratio tends to be higher”
2.) “Growth of productivity also makes for increase in aggregate output”
3.) “Backwardness carries an opportunity for modernization in disembodied, as well as in embodied, technology”
4.) “If countries at relatively low levels of industrialization contain large numbers of redundant workers in farming and petty trade, as is normally the case, there is also an opportunity for productivity growth by improving the allocation of labor” (387).
Countries who have the greatest opportunity to gain from technological convergence are those that are “socially advanced” but technologically backwards.
Restatement of hypothesis: “Countries that are technologically backward have a potentiality for generating growth more rapid than that of more advanced countries, providing their social capabilities are sufficiently developed to permit successful exploitation of technologies already employed by the technological leaders. The pace at which potential for catch-up is actually realized in a particular period depends on factors limiting the diffusion of knowledge, the rate of structural change, the accumulation of capital, and the expansion of demand. The process of catching up tends to be self-limiting, but the strength of the tendency may be weakened or overcome, at least for limited periods, by advantages connected with the convergence of production patterns as followers advance towards leaders or by an endogenous enlargement of social capabilities” (391).
Abramovits then explores historical data related to the phenomena of catching up.
Catching-up is a phenomena that occurs when some are behind technologically but where they have achieved sufficient social capital to make the adoption of new technologies feasible.
Tuesday, September 2, 2008
Solow: Reflections on Growth Theory
Solow, R., 2005. Reflections on growth theory. In Handbook of Economic Growth. Aghion, P, Durlauf.
Solow’s introduction to the Handbook emphasized a couple of direction that growth models have failed to head. One of those is making the models multi-sectoral. “…Leif Johansen had an early book, orientated toward planning. Luigi Pasinetti has written extensively on the sorts of structural changes to be expected along a trajectory, arising from such inevitable factors as differing income elasticities of demand for different goods. In a very different vein, there was a whole literature stemming from the von Neumann model, which now seems to have gone out of favor. Xavier Sala-i-Martin’s chapter in the Handbook reviews some worthwhile developments and promises others” (4).
There was work on two sector models, but this didn’t last as long as it possibly should have. “I have the feeling that too much in those models turned out to depend on differences in factor intensity between the sectors. We have very little in the way of facts or intuition about that issue, and there was no reason to expect or postulate any systematic pattern that could lead to exciting results” (4).
Endogenizing technology and human capital: “I can now turn from the things that growth theory has not accomplished to the things that it has done, in particular the way it has expanded outside the confines of a narrow model. The main effort has quite properly gone into the endogenization of changes in technology…and changes in the stock of human capital” (6).
Solow’s introduction to the Handbook emphasized a couple of direction that growth models have failed to head. One of those is making the models multi-sectoral. “…Leif Johansen had an early book, orientated toward planning. Luigi Pasinetti has written extensively on the sorts of structural changes to be expected along a trajectory, arising from such inevitable factors as differing income elasticities of demand for different goods. In a very different vein, there was a whole literature stemming from the von Neumann model, which now seems to have gone out of favor. Xavier Sala-i-Martin’s chapter in the Handbook reviews some worthwhile developments and promises others” (4).
There was work on two sector models, but this didn’t last as long as it possibly should have. “I have the feeling that too much in those models turned out to depend on differences in factor intensity between the sectors. We have very little in the way of facts or intuition about that issue, and there was no reason to expect or postulate any systematic pattern that could lead to exciting results” (4).
Endogenizing technology and human capital: “I can now turn from the things that growth theory has not accomplished to the things that it has done, in particular the way it has expanded outside the confines of a narrow model. The main effort has quite properly gone into the endogenization of changes in technology…and changes in the stock of human capital” (6).
Monday, September 1, 2008
Jones: Introduction to Economic Growth
Jones, C., 1998. Introduction to Economic Growth. New York.
Why are we so rich and they are so poor? That is a fundamental question driving theories of economic growth. This was famously explored by Smith in The Wealth of Nations. More recently, this was explored by Solow. “Solow’s theories helped to clarify the role of the accumulation of physical capital and emphasized the importance of technological progress as the ultimate driving force behind sustained economic growth” (2). This work continued apace throughout the 60s and 70s, eventually building to contributions made by Romer and Lucas. These authors focused on human capital and the importance of ideas for economic growth. Barro quantified many of these ideas.
The book is an exploration of economic growth theory from the perspective of the relationship between observation and theory. The author uses the analogy of astronomy in the hard sciences.
1: Per-capita income varies between countries
2: Economic growth rates vary from country to country
3: Growth not entirely consistent over time
4: Countries can become wealthy or poor
5: US has seen steady growth
“Facts” about the US over the last century: Kaldor: “…economic theorists should begin with a summary of the ‘stylized’ facts a theory was supposed to explain” (14). First fact: “…the rate of return to capital is roughly constant…” (14). Secondly: the labor share has been mostly constant across history, looking specifically at the US. The combination of stylized fact one and two is that the ratio of K/Y is relatively stable. The third stylized fact alters one of Kaldor’s facts: there is relative consistent growth in economic growth.
6: Growth in output and trade are related (15)
7: Skilled and unskilled workers show a tendency to move from poor to rich countries
Three questions explored here: Why are some rich and some poor? What drives economic growth? And finally: how do some countries transition so quickly to becoming rich?
Solow’s Model:
Assumptions: world comprised of countries producing a single good. No international trade because there is only one good. Consumers have a percentage that they save for future consumption and a percentage that they use for consumption.
The model is constructed around two equations: production function and capital accumulation.
The production function acts as a saturating curve with respect to increases in capital relative to workers: there are diminishing returns on investment. Secondly, capital accumulation change is equal to the amount of investment minus the amount of depreciation.
Consumers save a portion of their income, which is invested, or rented, for use in production.
Capital accumulation per worker is determined by three things. It is increased with investment in workers, it is decreased with depreciation and the new term is change in the size of labor relative to capital.
A basic Solow diagram is shown that compares two plotted equations. One is a saturating curve that represents the amount of investment per person. The second curve is a line that represents the amount of new capital investment required per person required to keep the ratio of capital to worker consistent. Both equations begin at 0,0. When capital growth occurs per worker, capital deepening takes place. When per worker change is not taking place but capital grows, capital widening takes place. The amount of capital per worker constantly tries to approach the point where both lines intersect.
What happens if there is an increase in the investment rate? The saturating curve that represents the amount of investment per person shifts up. This starts a process of capital deepening.
What happens if there is an increase in the population growth? That shifts the degree of the relationship between the amount of capital investment required to keep the amount of capital per worker constant. “Investment per worker is now no longer high enough to keep the capital-labor ratio constant in the face of the rising population. Therefore, the capital-labor ratio begins to fall…At this point, the economy has less capital per worker than it began with and is therefore poorer: per capita output is ultimately lower after the increase in population growth…” (31-2).
The Steady State: “By definition, the steady-state quantity of capital per worker is determined by the condition that…” capital change is equal to zero (32).
“This equation reveals the Solow model’s answer to the question ‘Why are we so rich and they so poor?’ Countries that have higher savings/investment rates will tend to be richer…” (32). More capital/worker equals more output/worker. If you have high population growth, you will have lower production because you will have lower capital/worker: ie, these countries will focus on just trying to keep the capital/labor ratio stable and will have to emphasize capital widening with less of an opportunity to explore capital deepening.
These effects are then explored vis-Ã -vis empirical evidence: real GDP is compared to savings rate and real GDP is compared to population growth rates. There is seen to be a correlation (though the later graph, figure 2.7, doesn’t appear to display this correlation as well as claimed).
This model fails to describe increased per capital growth because output per unit of labor, and thus per person, is constant.
“To generate sustained growth in per capita income in this model, we must follow Solow and introduce technological progress to the model” (36). This is done through the variable a which increases labor’s productivity. This technology assumption is exogenously imposed.
“A situation in which capital, output, consumption, and population are growing at constant rates is called balanced growth path” (37).
“If the economy begins with a capital-technology ratio that is below its steady-state level…the capital-technology ratio {k~=K/AL} will rise gradually over time. Why? Because the amount of investment being undertaken exceeds the amount needed to keep the capital-technology ratio constant” (39).
“This exercise {Figure 2.10} illustrates two important points. First, policy changes in the Solow model increase growth rates, but only temporarily along the transition to the new steady state. That is, policy changes have no long-run growth effect. Second, policy changes can have level effects. That is, a permanent policy change can permanently raise (or lower) the level of per capita output” (41-3).
Some key aspects of the Solow Model: per capita growth happens because of exogenously imposed technology variables. Also, the reason some countries are better off than others is because they save and invest more, and thus increase the amount of capital per worker which makes them more efficient. There is also a more subtle explanation of why some countries grow more quickly than others: if their capital technology ratio (k~) is below the steady-state level for the long run, it will climb back quickly to that level. This might be an explanation for why Germany and Japan built back up their capital stocks so quickly after WWII. “Or it may explain why an economy that increases its investment rate will grow rapidly as it makes the transition to a higher output-technology ratio” (44-5). This may be applicable in situations like South Korea, for example.
Exploring output: as a stylized fact, output per person decreased after 1973. This was the case throughout the advanced countries. It remained relatively low into the end of the 1990s. Some thought that high energy prices could be the culprit, but this is improbable as real energy prices in the late 80s were lower than they were before the shock. Another thought is that the decreased productivity has to do with a transition from a manufacturing economy to a service economy. Another explanation blames a slow-down in funding for R&D in the late 1960’s. Alternatively, growth may have been artificially high in the 50s and 60s because of the rebuilding efforts after WWII.
The “New Economy” saw productivity increase in the late 1990s. This can be partially attributed to the increased use of information technology. Also, some posit that ICT can explain the slow-down in growth and the later improvement: the time-lag associated with diffusing new technologies in the early 1970s created productivity slowdowns that were only circumvented over 20 years later.
Ch. 3:
An influential paper by Mankiw, Romer and Weil put the Solow model to an empirical test, found that it was quite good, but added human capital to make it better. This extends the Solow model to include different levels of education and skills.
H, or the degree to that labor is skilled, is calculated based upon investment in education which rises at a relatively constant rate. For example, if someone invests one extra year on education, wages are expected to rise by about 10% for a life-time (Bils and Klenow (2000)). The amount that individuals invest in education is given exogenously.
K is also gathered by investing some output instead of consuming everything.
“Countries are rich because they have high investment rates in physical capital, spend a large fraction of time accumulating skills…, have low population growth rates, and have high levels of technology” (57).
An additional discussion about convergence and differences in growth rates. A piece by Gerschenkron (1952) and “backward” economies and how they grow faster to catch up is sited, as well as a piece by Abramovitz (1986).
Technology transfer may be a plausible cause of convergence, but the neoclassical model provides other explanations. “Why…do we see convergence among some sets of countries but a lack of convergence among the countries of the world as a whole? The neoclassical growth model suggests an important explanation for these findings” (66). “Among countries that have the same steady state, the convergence hypothesis should hold: poor countries should grow faster on average than rich countries” (68). This explains why there is convergence in some areas, but not all areas, as not every country has the same steady state, but countries who do have the same steady state are incentivized by structural forces to converge technologically.
There is then a brief discussion of income distribution, historical trends and future possible developments.
Ch. 4:
Neoclassical growth models explore the accumulation of physical and human capital in relation to labor stocks and technology, which is determined exogenously. Endogenous technological determination is crucial for the further establishment of economic growth models.
Romer writes about ideas. Ideas are nonrivalrous. Most goods are rivalrous, as my use of it excludes your use of it. Not ideas. An additional distinction made by Romer is that of excludability and non-excludability. “…the economics of ‘ideas’ is intimately tied to the presence of increasing returns to scale and imperfect competition” (83). Increasing returns to scale is seen in the initial costs of the development of an idea: these costs are fixed and may be large. Therefore, companies must charge a price that is above their marginal costs in order to recoup these fixed costs.
Authors like North (1981) see the imposition of intellectual property rights regimes as being crucial for the establishment of sustained economic growth because this incentivized innovation.
Ch. 5:
Endogenous technological change is explored through the lenses of Romer’s model. “The Romer model endogenizes technological progress by introducing the search for new ideas by researches interested in profiting from their inventions” (97).
As was the case with the Solow model, there are two main elements in the Romer model of endogenous technological change: an equation describing the production function and a set of equations describing how the inputs for the production function evolve over time” (98). “The Romer economy consists of three sectors: a final-goods sector, an intermediate-goods sector, and a research sector” (111).
The book continues and lays out different approaches to exploring technology endogenously and technology transfer issues.
Why are we so rich and they are so poor? That is a fundamental question driving theories of economic growth. This was famously explored by Smith in The Wealth of Nations. More recently, this was explored by Solow. “Solow’s theories helped to clarify the role of the accumulation of physical capital and emphasized the importance of technological progress as the ultimate driving force behind sustained economic growth” (2). This work continued apace throughout the 60s and 70s, eventually building to contributions made by Romer and Lucas. These authors focused on human capital and the importance of ideas for economic growth. Barro quantified many of these ideas.
The book is an exploration of economic growth theory from the perspective of the relationship between observation and theory. The author uses the analogy of astronomy in the hard sciences.
1: Per-capita income varies between countries
2: Economic growth rates vary from country to country
3: Growth not entirely consistent over time
4: Countries can become wealthy or poor
5: US has seen steady growth
“Facts” about the US over the last century: Kaldor: “…economic theorists should begin with a summary of the ‘stylized’ facts a theory was supposed to explain” (14). First fact: “…the rate of return to capital is roughly constant…” (14). Secondly: the labor share has been mostly constant across history, looking specifically at the US. The combination of stylized fact one and two is that the ratio of K/Y is relatively stable. The third stylized fact alters one of Kaldor’s facts: there is relative consistent growth in economic growth.
6: Growth in output and trade are related (15)
7: Skilled and unskilled workers show a tendency to move from poor to rich countries
Three questions explored here: Why are some rich and some poor? What drives economic growth? And finally: how do some countries transition so quickly to becoming rich?
Solow’s Model:
Assumptions: world comprised of countries producing a single good. No international trade because there is only one good. Consumers have a percentage that they save for future consumption and a percentage that they use for consumption.
The model is constructed around two equations: production function and capital accumulation.
The production function acts as a saturating curve with respect to increases in capital relative to workers: there are diminishing returns on investment. Secondly, capital accumulation change is equal to the amount of investment minus the amount of depreciation.
Consumers save a portion of their income, which is invested, or rented, for use in production.
Capital accumulation per worker is determined by three things. It is increased with investment in workers, it is decreased with depreciation and the new term is change in the size of labor relative to capital.
A basic Solow diagram is shown that compares two plotted equations. One is a saturating curve that represents the amount of investment per person. The second curve is a line that represents the amount of new capital investment required per person required to keep the ratio of capital to worker consistent. Both equations begin at 0,0. When capital growth occurs per worker, capital deepening takes place. When per worker change is not taking place but capital grows, capital widening takes place. The amount of capital per worker constantly tries to approach the point where both lines intersect.
What happens if there is an increase in the investment rate? The saturating curve that represents the amount of investment per person shifts up. This starts a process of capital deepening.
What happens if there is an increase in the population growth? That shifts the degree of the relationship between the amount of capital investment required to keep the amount of capital per worker constant. “Investment per worker is now no longer high enough to keep the capital-labor ratio constant in the face of the rising population. Therefore, the capital-labor ratio begins to fall…At this point, the economy has less capital per worker than it began with and is therefore poorer: per capita output is ultimately lower after the increase in population growth…” (31-2).
The Steady State: “By definition, the steady-state quantity of capital per worker is determined by the condition that…” capital change is equal to zero (32).
“This equation reveals the Solow model’s answer to the question ‘Why are we so rich and they so poor?’ Countries that have higher savings/investment rates will tend to be richer…” (32). More capital/worker equals more output/worker. If you have high population growth, you will have lower production because you will have lower capital/worker: ie, these countries will focus on just trying to keep the capital/labor ratio stable and will have to emphasize capital widening with less of an opportunity to explore capital deepening.
These effects are then explored vis-Ã -vis empirical evidence: real GDP is compared to savings rate and real GDP is compared to population growth rates. There is seen to be a correlation (though the later graph, figure 2.7, doesn’t appear to display this correlation as well as claimed).
This model fails to describe increased per capital growth because output per unit of labor, and thus per person, is constant.
“To generate sustained growth in per capita income in this model, we must follow Solow and introduce technological progress to the model” (36). This is done through the variable a which increases labor’s productivity. This technology assumption is exogenously imposed.
“A situation in which capital, output, consumption, and population are growing at constant rates is called balanced growth path” (37).
“If the economy begins with a capital-technology ratio that is below its steady-state level…the capital-technology ratio {k~=K/AL} will rise gradually over time. Why? Because the amount of investment being undertaken exceeds the amount needed to keep the capital-technology ratio constant” (39).
“This exercise {Figure 2.10} illustrates two important points. First, policy changes in the Solow model increase growth rates, but only temporarily along the transition to the new steady state. That is, policy changes have no long-run growth effect. Second, policy changes can have level effects. That is, a permanent policy change can permanently raise (or lower) the level of per capita output” (41-3).
Some key aspects of the Solow Model: per capita growth happens because of exogenously imposed technology variables. Also, the reason some countries are better off than others is because they save and invest more, and thus increase the amount of capital per worker which makes them more efficient. There is also a more subtle explanation of why some countries grow more quickly than others: if their capital technology ratio (k~) is below the steady-state level for the long run, it will climb back quickly to that level. This might be an explanation for why Germany and Japan built back up their capital stocks so quickly after WWII. “Or it may explain why an economy that increases its investment rate will grow rapidly as it makes the transition to a higher output-technology ratio” (44-5). This may be applicable in situations like South Korea, for example.
Exploring output: as a stylized fact, output per person decreased after 1973. This was the case throughout the advanced countries. It remained relatively low into the end of the 1990s. Some thought that high energy prices could be the culprit, but this is improbable as real energy prices in the late 80s were lower than they were before the shock. Another thought is that the decreased productivity has to do with a transition from a manufacturing economy to a service economy. Another explanation blames a slow-down in funding for R&D in the late 1960’s. Alternatively, growth may have been artificially high in the 50s and 60s because of the rebuilding efforts after WWII.
The “New Economy” saw productivity increase in the late 1990s. This can be partially attributed to the increased use of information technology. Also, some posit that ICT can explain the slow-down in growth and the later improvement: the time-lag associated with diffusing new technologies in the early 1970s created productivity slowdowns that were only circumvented over 20 years later.
Ch. 3:
An influential paper by Mankiw, Romer and Weil put the Solow model to an empirical test, found that it was quite good, but added human capital to make it better. This extends the Solow model to include different levels of education and skills.
H, or the degree to that labor is skilled, is calculated based upon investment in education which rises at a relatively constant rate. For example, if someone invests one extra year on education, wages are expected to rise by about 10% for a life-time (Bils and Klenow (2000)). The amount that individuals invest in education is given exogenously.
K is also gathered by investing some output instead of consuming everything.
“Countries are rich because they have high investment rates in physical capital, spend a large fraction of time accumulating skills…, have low population growth rates, and have high levels of technology” (57).
An additional discussion about convergence and differences in growth rates. A piece by Gerschenkron (1952) and “backward” economies and how they grow faster to catch up is sited, as well as a piece by Abramovitz (1986).
Technology transfer may be a plausible cause of convergence, but the neoclassical model provides other explanations. “Why…do we see convergence among some sets of countries but a lack of convergence among the countries of the world as a whole? The neoclassical growth model suggests an important explanation for these findings” (66). “Among countries that have the same steady state, the convergence hypothesis should hold: poor countries should grow faster on average than rich countries” (68). This explains why there is convergence in some areas, but not all areas, as not every country has the same steady state, but countries who do have the same steady state are incentivized by structural forces to converge technologically.
There is then a brief discussion of income distribution, historical trends and future possible developments.
Ch. 4:
Neoclassical growth models explore the accumulation of physical and human capital in relation to labor stocks and technology, which is determined exogenously. Endogenous technological determination is crucial for the further establishment of economic growth models.
Romer writes about ideas. Ideas are nonrivalrous. Most goods are rivalrous, as my use of it excludes your use of it. Not ideas. An additional distinction made by Romer is that of excludability and non-excludability. “…the economics of ‘ideas’ is intimately tied to the presence of increasing returns to scale and imperfect competition” (83). Increasing returns to scale is seen in the initial costs of the development of an idea: these costs are fixed and may be large. Therefore, companies must charge a price that is above their marginal costs in order to recoup these fixed costs.
Authors like North (1981) see the imposition of intellectual property rights regimes as being crucial for the establishment of sustained economic growth because this incentivized innovation.
Ch. 5:
Endogenous technological change is explored through the lenses of Romer’s model. “The Romer model endogenizes technological progress by introducing the search for new ideas by researches interested in profiting from their inventions” (97).
As was the case with the Solow model, there are two main elements in the Romer model of endogenous technological change: an equation describing the production function and a set of equations describing how the inputs for the production function evolve over time” (98). “The Romer economy consists of three sectors: a final-goods sector, an intermediate-goods sector, and a research sector” (111).
The book continues and lays out different approaches to exploring technology endogenously and technology transfer issues.
Monday, August 11, 2008
Rose: Input-Output Economics and Compuatable General Equilibrium Models
Rose, A., 1995. Input-output economics and computable general equilibrium models. Structural Change and Economic Dynamics, 6(3), 295-304.
“My experience is that economists trained before the mid-1970s readily appreciate and acknowledge Leontief’s work, while many of those trained scine, including those standing on his broad shoulders, have distanced themselves from input-output analysis. I refer primarily to those working in the area of computable general equilibrium (CGE) models” (296).
I-O models are crucial for the development of CGE models. Also, I-O models offer a different kind of analysis of market interaction and dependencies and are not based on assumptions of equilibrium or certain kind of actor behavior.
Footnote 3: “Most CGE models are based on a social accounting matrix (SAM), a framework developed by Stone (1966). A SAM is a matrix of interactions in the spirit of the production relationships of I-O, with a much greater emphasis on institution accounts” (296).
“Several features of I-O analysis clearly distinguish it form its precursors and continue to be of lasting value to its direct descendants and to other models” (297).
It is rooted in technological development. It bridges the divide between economists and business people/factory people. The simplicity of the table is a strength. Help facilitate discussions between private and public sector interactions. I-O accounting is used globally and is not political. I-O analysis accounts for all input factors in production, something that many neoclassical accounts do not.
I-O Myths:
I-O has no role for prices.
I-O is static.
*plus more, but I was only interested in the above
“One of the major areas of the relative advantage of CGE is international and interregional competition…Other areas of advantage of CGE models include tax policy, where behavioral considerations are crucial” (301).
“My experience is that economists trained before the mid-1970s readily appreciate and acknowledge Leontief’s work, while many of those trained scine, including those standing on his broad shoulders, have distanced themselves from input-output analysis. I refer primarily to those working in the area of computable general equilibrium (CGE) models” (296).
I-O models are crucial for the development of CGE models. Also, I-O models offer a different kind of analysis of market interaction and dependencies and are not based on assumptions of equilibrium or certain kind of actor behavior.
Footnote 3: “Most CGE models are based on a social accounting matrix (SAM), a framework developed by Stone (1966). A SAM is a matrix of interactions in the spirit of the production relationships of I-O, with a much greater emphasis on institution accounts” (296).
“Several features of I-O analysis clearly distinguish it form its precursors and continue to be of lasting value to its direct descendants and to other models” (297).
It is rooted in technological development. It bridges the divide between economists and business people/factory people. The simplicity of the table is a strength. Help facilitate discussions between private and public sector interactions. I-O accounting is used globally and is not political. I-O analysis accounts for all input factors in production, something that many neoclassical accounts do not.
I-O Myths:
I-O has no role for prices.
I-O is static.
*plus more, but I was only interested in the above
“One of the major areas of the relative advantage of CGE is international and interregional competition…Other areas of advantage of CGE models include tax policy, where behavioral considerations are crucial” (301).
Monday, August 4, 2008
Gibson and Seventer: A Tale of Two Models
Gibson, B. & Van Seventer, D., 2000. A Tale of Two Models: comparing structuralist and neoclassical computable general equilibrium models for South Africa. International Review of Applied Economics, 14(2), 149-171.
“This paper compares two working models of the South African economy, an orthodox, neoclassical computable general equilibrium model in which savings drive investment, and a more structuralist, eclectic, model for which there is an independent investment function” (149).
“It is seen that the neoclassical model fully supports the principles of the `Washington Consensus’ while the structuralist model requires a far more heterodox set of policies to avoid slow growth or high inflation” (149).
They calibrate both models to the same SAM. The regional focus is South Africa.
They make a distinction between structuralist and neoclassical models. In neoclassical, or orthodox models, government spending is always a problem at the macro level: there is a clear inverse relationship between government spending and economic growth. Government spending can lead to, “…current account deficits, real exchange rate appreciation and an accelerated decline in export performance” (150).
Structuralist models make different assumptions, and do not rely solely on state-based explanations. “It is not typically assumed that resources are fully utilized in structuralist models, thereby opening a range of demand-side, employment generating policy options, options that have little relevance in the orthodox setting. “What makes a structuralist model structuralist is the specific and path-dependent character of the economy under study” (150).
Orthodox modeling conceptions are derived from Dvarajan and Lewis (1990): “There are two sectors, traded and non-traded and three goods, counting imports. The exportable is not consumed at home and the home good is not exported” (151). “A second important assumption is that there is only one race and one class of consumers in the prototype version, even though there are 13 occupational categories, six income classes and four races in the base SAM” (151). “From the orthodox perspective, this model has many desirable properties.
The structuralist model takes time into account. In this way, it is dynamic and more useful than the static neoclassical model.
The authors find that the neoclassical model fits nicely with “Washington Consensus” conceptions of trade openness and taxation. The structuralist model is much more vague in its conclusions.
“This paper compares two working models of the South African economy, an orthodox, neoclassical computable general equilibrium model in which savings drive investment, and a more structuralist, eclectic, model for which there is an independent investment function” (149).
“It is seen that the neoclassical model fully supports the principles of the `Washington Consensus’ while the structuralist model requires a far more heterodox set of policies to avoid slow growth or high inflation” (149).
They calibrate both models to the same SAM. The regional focus is South Africa.
They make a distinction between structuralist and neoclassical models. In neoclassical, or orthodox models, government spending is always a problem at the macro level: there is a clear inverse relationship between government spending and economic growth. Government spending can lead to, “…current account deficits, real exchange rate appreciation and an accelerated decline in export performance” (150).
Structuralist models make different assumptions, and do not rely solely on state-based explanations. “It is not typically assumed that resources are fully utilized in structuralist models, thereby opening a range of demand-side, employment generating policy options, options that have little relevance in the orthodox setting. “What makes a structuralist model structuralist is the specific and path-dependent character of the economy under study” (150).
Orthodox modeling conceptions are derived from Dvarajan and Lewis (1990): “There are two sectors, traded and non-traded and three goods, counting imports. The exportable is not consumed at home and the home good is not exported” (151). “A second important assumption is that there is only one race and one class of consumers in the prototype version, even though there are 13 occupational categories, six income classes and four races in the base SAM” (151). “From the orthodox perspective, this model has many desirable properties.
The structuralist model takes time into account. In this way, it is dynamic and more useful than the static neoclassical model.
The authors find that the neoclassical model fits nicely with “Washington Consensus” conceptions of trade openness and taxation. The structuralist model is much more vague in its conclusions.
Devarajan et al.: Policy Lessons from Trade-Focused, Two-Sector Models
Devarajan, S., Lewis, J. & Robinson, S., 1990. Policy Lessons from Trade-Focused, Two-Sector Models. Journal of Policy Modeling, 12(4), 625-657.
These authors create a one country, two-sector, three good CGE trade model that is designed to be simple, or, in their words, minimalist. The benefits to this are clear: the CGE becomes much less of a black box. They call it the 1-2-3 model.
“The model has three actors: a producer, a household, and the rest of the world” (627).
“The 1-2-3 model is different from the standard neoclassical trade model with all goods tradable and all tradables perfect substitutes with domestic goods. The standard model, long a staple of trade theory, yields wildly implausible results in empirical applications” (630). One way to work around this is building on the word of Salter (1959) and Swan (1960) that separates tradables from non-tradables.
They claim that their 1-2-3 model is Walrasian, even though there are macro-level closures. “The additions of government, savings-investment, and the balance of trade are done in ways that retain the notion of flow equilibrium and do not strain the Walrasian paradigm” (642). They also highlight two different approaches on “macro closures”: in the first approach, macro-level factors are exogenous. “In the second approach, the CGE model is extended to include variables typically found in macro models…and to expand the notion of equilibrium to incorporate asset markets and expectations. The intent is to build CGE models that move beyond the Walrasian paradigm and directly incorporate macro phenomena” (642).
The started with the 1-2-3 model, then added macro-level factors like tariffs, subsidies, taxes, savings and investment. The addition of savings and investment brought up the need to discuss closure rules. Thus, a minimalist CGE model is built upon to make it more realistic.
These authors create a one country, two-sector, three good CGE trade model that is designed to be simple, or, in their words, minimalist. The benefits to this are clear: the CGE becomes much less of a black box. They call it the 1-2-3 model.
“The model has three actors: a producer, a household, and the rest of the world” (627).
“The 1-2-3 model is different from the standard neoclassical trade model with all goods tradable and all tradables perfect substitutes with domestic goods. The standard model, long a staple of trade theory, yields wildly implausible results in empirical applications” (630). One way to work around this is building on the word of Salter (1959) and Swan (1960) that separates tradables from non-tradables.
They claim that their 1-2-3 model is Walrasian, even though there are macro-level closures. “The additions of government, savings-investment, and the balance of trade are done in ways that retain the notion of flow equilibrium and do not strain the Walrasian paradigm” (642). They also highlight two different approaches on “macro closures”: in the first approach, macro-level factors are exogenous. “In the second approach, the CGE model is extended to include variables typically found in macro models…and to expand the notion of equilibrium to incorporate asset markets and expectations. The intent is to build CGE models that move beyond the Walrasian paradigm and directly incorporate macro phenomena” (642).
The started with the 1-2-3 model, then added macro-level factors like tariffs, subsidies, taxes, savings and investment. The addition of savings and investment brought up the need to discuss closure rules. Thus, a minimalist CGE model is built upon to make it more realistic.
Thursday, July 10, 2008
Hertel, et. al.: Distributional Effects of WTO Agricultural Reforms in Righ and Poor Countries
Hertel, Thomas W., Roman Keeney, Maros Ivanic, and L. Alan Winters. 2007. “Distributional effects of WTO agricultural reforms in rich and poor countries..” Economic Policy 22:289-336.
CGE contextualized, defined:
“General equilibrium, which dates back to Leon Walras (1834–1910), is one of
the crowning intellectual achievements of economics. It recognizes that there
are many markets and that they interact in complex ways so that, loosely
speaking, everything depends on everything else. Demand for any one good
depends on the prices of all other goods and on income. Income, in turn, depends
on wages, profits and rents, which depend on technology, factor supplies and
production, the last of which, in its turn, depends on sales (i.e., demand). Prices
depend on wages and profits and vice versa” (294).
CGE limitations:
“The models have their limitations, however. First, CGE simulations
are not unconditional predictions but rather ‘thought experiments’ about what
the world would be like if the policy change had been operative in the assumed
circumstances and year. The real world will doubtless have changed by the
time we get there. Second, while CGE models are quantitative, they are not
empirical in the sense of econometric modelling: they are basically theoretical,
with limited possibilities for rigorous testing against experience. Third, conclusions
about trade policy are very sensitive to the levels assumed for trade restrictions
in the base data. One can readily do sensitivity analysis on the parameter
values assumed for economic behaviour (as we have done in this paper), but
less so on the data because altering one element of the base data requires
compensating changes elsewhere in order to keep the national accounts and
social accounting matrix in balance. Of course, many of these criticisms apply
to other types of economic modelling and, therefore, while imperfect, CGE
models remain the preferred tool for analysis of global trade policy issues” (295)
CGE contextualized, defined:
“General equilibrium, which dates back to Leon Walras (1834–1910), is one of
the crowning intellectual achievements of economics. It recognizes that there
are many markets and that they interact in complex ways so that, loosely
speaking, everything depends on everything else. Demand for any one good
depends on the prices of all other goods and on income. Income, in turn, depends
on wages, profits and rents, which depend on technology, factor supplies and
production, the last of which, in its turn, depends on sales (i.e., demand). Prices
depend on wages and profits and vice versa” (294).
CGE limitations:
“The models have their limitations, however. First, CGE simulations
are not unconditional predictions but rather ‘thought experiments’ about what
the world would be like if the policy change had been operative in the assumed
circumstances and year. The real world will doubtless have changed by the
time we get there. Second, while CGE models are quantitative, they are not
empirical in the sense of econometric modelling: they are basically theoretical,
with limited possibilities for rigorous testing against experience. Third, conclusions
about trade policy are very sensitive to the levels assumed for trade restrictions
in the base data. One can readily do sensitivity analysis on the parameter
values assumed for economic behaviour (as we have done in this paper), but
less so on the data because altering one element of the base data requires
compensating changes elsewhere in order to keep the national accounts and
social accounting matrix in balance. Of course, many of these criticisms apply
to other types of economic modelling and, therefore, while imperfect, CGE
models remain the preferred tool for analysis of global trade policy issues” (295)
Arrow and Debreu: Existence of an Equilibrium for a Competitive Economy
Arrow, KJ, and G Debreu. 1954. “Existence of an Equilibrium for a Competitive Economy.” Econometrica 22:265-290.
Stemming from Walras: “It was assumed that each consumer acts so as to maximize his utility, each producer acts so as to maximize his profit, and perfect competition prevails, in the sense that each producer and consumer regards the prices paid and received as in- dependent of his own choices” (265).
On the need for these types of models: “Descriptively, the view that the competitive model is a reasonably accurate description of reality, at least for certain purposes” (265).
Results of this paper: “The main results of this paper are two theorems stating very general conditions under which a competitive equilibrium will exist” (266).
UPDATE:
"Walras did not, however, give any conclusive
arguments to show that the equations, as given, have a solution" (265)
Stemming from Walras: “It was assumed that each consumer acts so as to maximize his utility, each producer acts so as to maximize his profit, and perfect competition prevails, in the sense that each producer and consumer regards the prices paid and received as in- dependent of his own choices” (265).
On the need for these types of models: “Descriptively, the view that the competitive model is a reasonably accurate description of reality, at least for certain purposes” (265).
Results of this paper: “The main results of this paper are two theorems stating very general conditions under which a competitive equilibrium will exist” (266).
UPDATE:
"Walras did not, however, give any conclusive
arguments to show that the equations, as given, have a solution" (265)
Conrad: Computable General Equilibrium Models for Environmental Econnomics and Policy Analysis
Conrad, Klaus. 1999. “Computable General Equilibrium Models for Environmental Economics and Policy Analysis.” Pp. 1060-1088 in Handbook of environmental and resource economics.
“A CGE model is a system of linear and non-linear equations that is solved to simulate market equilibrium. It includes equations describing consumer and producer supply an demand behavior that are derived explicitly from conditions for profit or utility maximization, and market-clearing conditions in product and input markets. Unlike inter-industry input-output models and other earlier economy-wide planning models, household factor income and expenditures are linked in a theoretically appropriate manner” (1062).
“A CGE model is a system of linear and non-linear equations that is solved to simulate market equilibrium. It includes equations describing consumer and producer supply an demand behavior that are derived explicitly from conditions for profit or utility maximization, and market-clearing conditions in product and input markets. Unlike inter-industry input-output models and other earlier economy-wide planning models, household factor income and expenditures are linked in a theoretically appropriate manner” (1062).
Shoven and Whalley: Applying General Equilibrium
Shoven, John B, and John Whalley. 1992. Applying General Equilibrium. Cambridge University Press.
“A general equilibrium model of an economy can be best understood as one in which there are markets for each of N commodities, and consistent optimization occurs as part of equilibrium. Consumers maximize utility subject to their budget constraint, leading to demand-side specification of the model. Producers maximize profits, leading to the production-side specification. In equilibrium, market prices are such that the required equilibrium conditions hold. Demand equals supply for all commodities, and in the constant-returns-to-scale case zero-profit conditions are satisfied for each industry” (9).
“The applied general equilibrium models in operation today differ substantially from one another. Some are large-scale multipurpose models; others, small-scale issue-specific models. They vary in their country of application, use of functional forms, and treatment of such issues as time, foreign trade, and the government sector. Their use of data and parameter values also varies” (71).
“Although the general equilibrium model appropriate for any particular application depends largely on the policy issues being addressed, most applied models currently in use have a similar form. They are typically variants of static, two-factor models that have long been employed in public finance and international trade…Most models involve more than two goods, while aggregating the factors of production into two broad types—capital and labor” (92).
“Choice of the level of aggregation for an applied model is one of the more difficult design issues that any prospective modeler must confront. ON the one hand, there is the natural desire to make the model as detailed as possible in the belief that this will increase its realism. On the other hand, more detail is not always beneficial; much of it may prove superfluous to the issues at hand: (100).
“A general equilibrium model of an economy can be best understood as one in which there are markets for each of N commodities, and consistent optimization occurs as part of equilibrium. Consumers maximize utility subject to their budget constraint, leading to demand-side specification of the model. Producers maximize profits, leading to the production-side specification. In equilibrium, market prices are such that the required equilibrium conditions hold. Demand equals supply for all commodities, and in the constant-returns-to-scale case zero-profit conditions are satisfied for each industry” (9).
“The applied general equilibrium models in operation today differ substantially from one another. Some are large-scale multipurpose models; others, small-scale issue-specific models. They vary in their country of application, use of functional forms, and treatment of such issues as time, foreign trade, and the government sector. Their use of data and parameter values also varies” (71).
“Although the general equilibrium model appropriate for any particular application depends largely on the policy issues being addressed, most applied models currently in use have a similar form. They are typically variants of static, two-factor models that have long been employed in public finance and international trade…Most models involve more than two goods, while aggregating the factors of production into two broad types—capital and labor” (92).
“Choice of the level of aggregation for an applied model is one of the more difficult design issues that any prospective modeler must confront. ON the one hand, there is the natural desire to make the model as detailed as possible in the belief that this will increase its realism. On the other hand, more detail is not always beneficial; much of it may prove superfluous to the issues at hand: (100).
Tuesday, July 8, 2008
Dellink: Modelling the Costs of Environmental Policy
Dellink, Rob B. 2005. Modelling the Costs of Environmental Policy: A Dynamic Applied General Equilibrium Assessment. Edward Elgar Publishing.
Different kinds of economic models:
Partial equilibrium models: “…describe those markets in an economy that are relevant for the analysis at hand” (13).
General equilibrium models: “…are similar to partial equilibrium models, with the main difference that general equilibrium models describe the entire economy” (13). See Ginsburg and Keyzer 1997.
Input-output models: “…can be regarded as simplified general equilibrium models, since they assume that substitution possibilities are absent” (13).
Neo-classical growth models: “…share their micro-economic foundation with general equilibrium models, but look at the development of the economy over time. Dynamic general equilibrium models are effectively neo-classical growth models” (14).
Endogenous growth models: “…emerged from neo-classical growth models, as many authors were dissatisfied with the fact that exogenously –given technological change is the driving force of economic growth in the neo-classical growth models. Therefore, models were developed that describe technological change endogenously” (14).
Neo-Keynesian models: “…are not based entirely on micro-economic theory, but rather on extrapolation of historic trends” (14).
There are three conditions that must be met for AGE models: zero profit, household income condition (that expenses can never be above income) and the market clearing condition.
UPDATE:
Different specifications of models:
Theoretical v. applied
Static v. dynamic
For dynamic: myopic for forward looking
Determistic v. stochastic
Calibrated v. estimated
Geographical scale
How integrated within sub-models
Tech progress: endogenous or exogenous (15-6)
Three basic conditions for AGEs:
Zero profit condition: “…under constant returns to scale the value of output has to equal the value of all inputs…firms that have a constant returns to scale production function and that operate under full competition will never be able to reap any excess profits. Note that this does not imply that there is no return to capital: capital is one of the inputs to production and receives a payment like all other inputs” (17).
Income condition: “Households cannot increase their expenditures above their income…Total income may stem from payments for the supply of labour and capital to the firms and from tax revenues” (17).
Market clearing condition: “For each good, the market clearing conditionhas to be satisfied, that is, total demand equals total supply. For the primary production factors, labour and capital, this means that total demand for these goods must be equal to the total amount available” (17).
“Applied general equilibrium models are generalized input-output models, where substitution is allowed and prices are determined within the model. They can be seen as a system of non-linear equations, which can be solved simultaneously. The essence of AGEs is that prices of all goods are determined within the model such that all the conditions stated above are satisfied simultaneously. The economy can be described in the AGE model as a set of balances: for every demand there is a supply” (18).
Different kinds of economic models:
Partial equilibrium models: “…describe those markets in an economy that are relevant for the analysis at hand” (13).
General equilibrium models: “…are similar to partial equilibrium models, with the main difference that general equilibrium models describe the entire economy” (13). See Ginsburg and Keyzer 1997.
Input-output models: “…can be regarded as simplified general equilibrium models, since they assume that substitution possibilities are absent” (13).
Neo-classical growth models: “…share their micro-economic foundation with general equilibrium models, but look at the development of the economy over time. Dynamic general equilibrium models are effectively neo-classical growth models” (14).
Endogenous growth models: “…emerged from neo-classical growth models, as many authors were dissatisfied with the fact that exogenously –given technological change is the driving force of economic growth in the neo-classical growth models. Therefore, models were developed that describe technological change endogenously” (14).
Neo-Keynesian models: “…are not based entirely on micro-economic theory, but rather on extrapolation of historic trends” (14).
There are three conditions that must be met for AGE models: zero profit, household income condition (that expenses can never be above income) and the market clearing condition.
UPDATE:
Different specifications of models:
Theoretical v. applied
Static v. dynamic
For dynamic: myopic for forward looking
Determistic v. stochastic
Calibrated v. estimated
Geographical scale
How integrated within sub-models
Tech progress: endogenous or exogenous (15-6)
Three basic conditions for AGEs:
Zero profit condition: “…under constant returns to scale the value of output has to equal the value of all inputs…firms that have a constant returns to scale production function and that operate under full competition will never be able to reap any excess profits. Note that this does not imply that there is no return to capital: capital is one of the inputs to production and receives a payment like all other inputs” (17).
Income condition: “Households cannot increase their expenditures above their income…Total income may stem from payments for the supply of labour and capital to the firms and from tax revenues” (17).
Market clearing condition: “For each good, the market clearing conditionhas to be satisfied, that is, total demand equals total supply. For the primary production factors, labour and capital, this means that total demand for these goods must be equal to the total amount available” (17).
“Applied general equilibrium models are generalized input-output models, where substitution is allowed and prices are determined within the model. They can be seen as a system of non-linear equations, which can be solved simultaneously. The essence of AGEs is that prices of all goods are determined within the model such that all the conditions stated above are satisfied simultaneously. The economy can be described in the AGE model as a set of balances: for every demand there is a supply” (18).
Leontief: Input-output economics
Leontief, Wassily. 1986. Input-output Economics. Oxford University Press.
This text was originally published in 1966. It begins by exploring better ways to forecast economic variables. Input-output tables are seen as being crucial for this endeavor. The first input-output table for the US was produced for the year 1947.
“Without entering into technical details, it suffices to say that such input-output tables show the flows of goods and services among all the different sectors of a national economy, but that a broad tabulation of economic activity is not enough for business purposes. To supply a reliable statistical base for coordinated market analysis on the part of business firms, an input-output table must be much more detailed. It should describe the actual state of the particular national economy in the base year—that is, the year from which the forward-demand projections are to be made—in terms of, say, 150, 200, or even as many as 300 or 400 separate industries or sectors” (8).
“This article is concerned with a new effort to combine economic facts and theory known as ‘interindustroy’ or ‘input-output’ analysis. Essentially it is a method of analysis that takes advantage of the relatively stable pattern of the flow of goods and services among the elements of our economy to bring a much more detailed statistical picture of the system into the range of manipulation by economic theory” (14).
The table can be used to calculate the effects of cost changes, i.e., the cost of wage increases on certain sectors, the cost of tax changes on sectors, etc. Also, the model can show the relative robustness of different sectors of the economy. “The input-output table is not merely a device for displaying or storing information; it is above all an analytical tool” (43).
“The great virtue of input-output analysis is that it surfaces the indirect internal transactions of an economic system and brings them into the reckonings of economic theory” (44).
This text was originally published in 1966. It begins by exploring better ways to forecast economic variables. Input-output tables are seen as being crucial for this endeavor. The first input-output table for the US was produced for the year 1947.
“Without entering into technical details, it suffices to say that such input-output tables show the flows of goods and services among all the different sectors of a national economy, but that a broad tabulation of economic activity is not enough for business purposes. To supply a reliable statistical base for coordinated market analysis on the part of business firms, an input-output table must be much more detailed. It should describe the actual state of the particular national economy in the base year—that is, the year from which the forward-demand projections are to be made—in terms of, say, 150, 200, or even as many as 300 or 400 separate industries or sectors” (8).
“This article is concerned with a new effort to combine economic facts and theory known as ‘interindustroy’ or ‘input-output’ analysis. Essentially it is a method of analysis that takes advantage of the relatively stable pattern of the flow of goods and services among the elements of our economy to bring a much more detailed statistical picture of the system into the range of manipulation by economic theory” (14).
The table can be used to calculate the effects of cost changes, i.e., the cost of wage increases on certain sectors, the cost of tax changes on sectors, etc. Also, the model can show the relative robustness of different sectors of the economy. “The input-output table is not merely a device for displaying or storing information; it is above all an analytical tool” (43).
“The great virtue of input-output analysis is that it surfaces the indirect internal transactions of an economic system and brings them into the reckonings of economic theory” (44).
Monday, May 12, 2008
Adelman and Robinson: Income Distribution Policy in Developing Countries
Adelman, Irma, Sherman Robinson and World Bank. (1978). Income distribution policy in developing countries : a case study of Korea. Stanford, Calif.: Published for the World Bank [by] Stanford University Press.
This work begins by explicitly wanting to move the development debate away from a trickle-down economic approach to an approach that focuses more heavily on distribution.
“The model has five essential distinguishing features. It solves for prices endogenously in both factor and product markets. Its solution is based on achieving a measure of consistency among the results of individual optimizing behavior by a large number of actors…It incorporates income distribution, monetary phenomena, inflation, and foreign trade. It is dynamic, with imperfect intertemporal consistency. And, finally, it allows for varying principles of market clearing and institutional behavior” (3).
“The model operates by simulating the operation of factor and product markets with profit-maximizing firms and utility-maximizing households. It can thus be characterized as a computable general-equilibrium (CGE) model and is broadly in the neoclassical tradition, though it has a number of disequilibrium, non-neoclassical features. The overall model consists of a static, within-period adjustment model linked to a dynamic, intertemporal-adjustment model” (3).
“Basically, what differentiates our model from other multisectoral models is that it solves endogenously for wages and prices in a multifactor, multiconsumer, multiproduct world in which firm and consumer behavior is based on the optimization of separate objective functions. These features are emphasized in the simple CGE model” (19).
“The discussion of the model is organized around the activities of firms as buyers of factors and sellers of output and the activities of consumers as suppliers of factors and buyers of output. The circular flow identities which require that no income and no outputs be unaccounted for, is maintained in the model not only by production adjustments (as in other models), but also by price and factor income modifications. It is this feature that distinguishes CGE models from other economy-wide models” (20).
This work begins by explicitly wanting to move the development debate away from a trickle-down economic approach to an approach that focuses more heavily on distribution.
“The model has five essential distinguishing features. It solves for prices endogenously in both factor and product markets. Its solution is based on achieving a measure of consistency among the results of individual optimizing behavior by a large number of actors…It incorporates income distribution, monetary phenomena, inflation, and foreign trade. It is dynamic, with imperfect intertemporal consistency. And, finally, it allows for varying principles of market clearing and institutional behavior” (3).
“The model operates by simulating the operation of factor and product markets with profit-maximizing firms and utility-maximizing households. It can thus be characterized as a computable general-equilibrium (CGE) model and is broadly in the neoclassical tradition, though it has a number of disequilibrium, non-neoclassical features. The overall model consists of a static, within-period adjustment model linked to a dynamic, intertemporal-adjustment model” (3).
“Basically, what differentiates our model from other multisectoral models is that it solves endogenously for wages and prices in a multifactor, multiconsumer, multiproduct world in which firm and consumer behavior is based on the optimization of separate objective functions. These features are emphasized in the simple CGE model” (19).
“The discussion of the model is organized around the activities of firms as buyers of factors and sellers of output and the activities of consumers as suppliers of factors and buyers of output. The circular flow identities which require that no income and no outputs be unaccounted for, is maintained in the model not only by production adjustments (as in other models), but also by price and factor income modifications. It is this feature that distinguishes CGE models from other economy-wide models” (20).
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