growth models - CGPCS Exam Preparation

Bring out the differences and similarities between endogenous growth models and exogenous growth models.

Differences

Table 1

	Exogenous	Endogenous
Assumptions	Diminishing marginal returns on investments	Increasing marginal returns on capital investments
	Constant returns to scale/DRS?	Increasing returns to scale in aggregate production
		Focus on externalities in determining the rate of return on investments

Source of growth	Growth in Capital labour ratio due to savings and investment	Increasing returns are a source of growth, apart from technology, public and private investments in human capital, external economies and productivity improvements.
Eqn		Y=AK
Long term growth	Growth tapers off in the long run	Since there are no diminishing returns to capital, possibility exists that investments in physical and human capital can generate external economies and productivity that are enough to offset diminishing returns. The net result is sustained long term growth.
Convergence	Proposes convergence	No tendency for convergence. A temporary or prolonged recession in one country can lead to a permanent increase in the income gap between itself and wealthier countries
International flow of capital	Int flow of capital because of higher returns in developing countries. This leads to convergence	International flow of capital accentuates wealth disparity between developed and developing countries. Though return on investment in developing country may be high, complementary investments in human capital, infrastructure, or R&D are low.
Technological change	Do not explain technological change. Its exogenous.	Explain technological change as an endogenous outcome of public and private investments in human capital and knowledge intensive industries.

Similarity

Both emphasise the importance of savings and human capital investments for achieving rapid growht

Models of Coordination failure

Big Push

Models of structural change

Lewis’s two sector model
Chenery’s patterns of development

Convergence in Solow’s model. Assess.

Compare Rostow’s model with the Harrod-Domar model of growth.

Hypotheses of Underdevelopment

Geographic determinism

Basic Needs Approach

One of the approaches to the measurement of absolute poverty
It attempts to define the absolute minimum resources necessary for long term physical well-being usually in consumption goods
The poverty line is then defined as the amount of income required to satisfy those needs
Basic needs approach was introduced by the ILO in 1976 at its World Employment Conference
Traditional list of immediate basic needs is food, shelter and clothing.
Related approaches focus on capabilities rather than consumption

Basic needs approach and Development

Development programs following the basic needs approach do not invest in economically productive activities that will help a society carry its own weight in the future, rather it focuses on allowing the society to consume just enough to rise above the poverty line and meet its basic needs.
These programs focus more on subsistence than fairness
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Human Development Index

The Human Development Index (HDI) is a summary composite index that measures a country’s average achievements in three basic aspects of human development: health, knowledge, and income. It was first developed by the late Pakistani economist Mahbub ul Haq with the collaboration of the Nobel laureate Amartya Sen and other leading development thinkers for the first Human Development Report in 1990. It was introduced as an alternative to conventional measures of national development, such as level of income and the rate of economic growth.

The first Human Development Report introduced a new way of measuring development by combining indicators of life expectancy, educational attainment and income into a composite human development index, the HDI. The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.

There are three indices in HDI

Health Index: measured through Life expectancy at birth
- Min value: 20
- Max value: 83.2
- HI = (Actual – Min)/(Max-Min)
Education index is the geometric mean of
- Mean years of schooling: estimated based on duration of schooling at each level of education
- Expected years of schooling: estimated based on enrolment by age at all levels of education and population of official school age for each level of education
Living Standards: measured through ‘Gross National Income per Capita’
- Min: $163 (PPP)
- Max: $108,211 (PPP)
- Logarithm of income is used to reflect the diminishing importance of income with increasing GNI. Now natural logarithm is used. Earlier logarithm with the base of 10 was used.
Geometric mean of the above three is taken to get HDI.

Disaggregated HDI

One way the use of the human development index has been improved is through disaggregation.
Disaggregated HDIs are arrived at by using the data for the HDI components pertaining to each of the separate groups; treating each group as if it was a separate country.
Such groups may be defined relative to income, geographical or administrative regions, urban/rural residence, gender and ethnicity.

The hybrid HDI is a different version of the HDI that applies the same aggregation formula as the new HDI, but to a set of indicators used in the previous HDI – life expectancy, adult literacy, gross enrolment ratio and GDP per capita. It is used in the 2010 Report for analysis of historical HDI trends since 1970 because there is much more data available from past decades for those indicators. The hybrid HDI uses annual data from 1970 to 2010 for 135 countries.

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