MEcon Master of Economics Master of Economics: Economic Growth 3 — Questions and Answers
Question 1: What is 'conditional beta convergence' in the empirical growth literature?
- All countries converge to the same income level unconditionally
- Poor countries grow faster than rich ones only after controlling for determinants of each country's own steady state (Correct answer)
- Countries with the same savings rate always have identical growth rates
- Convergence that only applies within geographic regions
Correct answer: Poor countries grow faster than rich ones only after controlling for determinants of each country's own steady state
Conditional beta convergence holds that a country's growth rate is negatively related to its initial income gap relative to its own steady state, not relative to other countries' steady states.
Question 2: In a two-sector endogenous growth model with physical and human capital, a 'balanced growth path' requires:
- Physical capital grows faster than human capital
- Both physical and human capital grow at the same constant rate, keeping their ratio constant (Correct answer)
- Human capital is fully depreciated each period
- Only physical capital accumulates while human capital is fixed
Correct answer: Both physical and human capital grow at the same constant rate, keeping their ratio constant
A balanced growth path (BGP) requires all growing variables to grow at constant rates; in a two-capital model this means physical and human capital must grow proportionally to keep the capital ratio stationary.
Question 3: How does the 'curse of natural resources' (resource curse) relate to economic growth theory?
- Countries with abundant resources always grow faster due to export revenues
- Resource-rich countries often exhibit lower long-run growth, possibly due to Dutch disease and institutional deterioration (Correct answer)
- Natural resources have no effect on long-run growth according to the Solow model
- The resource curse only affects landlocked developing countries
Correct answer: Resource-rich countries often exhibit lower long-run growth, possibly due to Dutch disease and institutional deterioration
The resource curse describes the paradox where resource-abundant countries often underperform, attributed to Dutch disease effects on tradable sectors and rent-seeking that weakens institutional quality.
Question 4: In the Arrow (1962) learning-by-doing model, productivity growth arises from:
- Deliberate R&D investment by profit-maximizing firms
- Productivity improvements that spill over from cumulative investment experience across the economy (Correct answer)
- Government-directed industrial policy targeting high-tech sectors
- Foreign direct investment bringing new technology
Correct answer: Productivity improvements that spill over from cumulative investment experience across the economy
Arrow's model assumes firms become more productive as they accumulate investment experience, but since spillovers make this knowledge non-rival and non-excludable, growth is a by-product of investment rather than intentional innovation.
Question 5: What is the role of 'social capital' in augmented growth models?
- It replaces physical capital as the primary driver of output
- Trust, norms, and networks reduce transaction costs and improve the efficiency of resource allocation, boosting TFP (Correct answer)
- Social capital causes convergence clubs to disappear
- It only matters for growth in post-conflict economies
Correct answer: Trust, norms, and networks reduce transaction costs and improve the efficiency of resource allocation, boosting TFP
Social capital (Putnam, Knack & Keefer) is incorporated into growth models as a determinant of total factor productivity, operating through reduced transaction costs, better contract enforcement, and cooperative behavior.
Question 6: Which test distinguishes between absolute and conditional convergence in a cross-country growth regression?
- Including only initial income as the right-hand-side variable tests conditional convergence
- Including initial income alone tests absolute convergence; adding structural controls tests conditional convergence (Correct answer)
- The Hausman test determines convergence type
- Unit-root tests on per-capita GDP determine convergence type
Correct answer: Including initial income alone tests absolute convergence; adding structural controls tests conditional convergence
Running a growth regression on initial income alone tests absolute convergence (all countries converge to the same level), while adding controls for steady-state determinants tests conditional convergence.
Question 7: In Aghion and Howitt's (1992) Schumpeterian model, what determines the economy's growth rate?
- The stock of physical capital and its depreciation rate
- The probability and size of innovations, driven by the level of R&D investment (Correct answer)
- The government's spending on public goods
- Population growth and natural resource availability
Correct answer: The probability and size of innovations, driven by the level of R&D investment
In the Aghion-Howitt model, growth is determined by the Poisson arrival rate of innovations (proportional to R&D labor) multiplied by the average quality improvement each innovation brings.
MEcon Master of Economics Master of Economics: Economic Growth 3
What is 'conditional beta convergence' in the empirical growth literature?