MEcon Master of Economics Master of Economics: Economic Growth 4 — Questions and Answers
Question 1: What does Kaldor's stylized fact that 'the capital-output ratio is roughly constant over time' imply for growth models?
- Output must grow at the same rate as the capital stock, which is characteristic of a balanced growth path (Correct answer)
- Capital accumulation is irrelevant for long-run growth
- The savings rate must be declining over time
- Diminishing returns to capital are absent in developed economies
Correct answer: Output must grow at the same rate as the capital stock, which is characteristic of a balanced growth path
A stable capital-output ratio means K and Y grow proportionally, which is the definition of a balanced growth path—a key target for growth models to match the data.
Question 2: In the overlapping generations (OLG) model of growth, dynamic inefficiency occurs when:
- The interest rate exceeds the population growth rate
- The interest rate falls below the population growth rate, meaning the economy has over-accumulated capital (Correct answer)
- The government runs a balanced budget every period
- The savings rate is below the golden-rule level
Correct answer: The interest rate falls below the population growth rate, meaning the economy has over-accumulated capital
Dynamic inefficiency arises in OLG models when r < n: the economy is saving too much, and a pay-as-you-go social security system can make every generation better off by reducing over-accumulation.
Question 3: What is the 'broad capital' interpretation of the Solow model, and how does it address the model's empirical shortcomings?
- It restricts capital to only physical machinery to improve parameter estimation
- It includes human capital alongside physical capital, raising capital's share and reducing the implied speed of convergence to match data (Correct answer)
- It assumes zero depreciation of all capital forms
- It eliminates the need for total factor productivity as a residual
Correct answer: It includes human capital alongside physical capital, raising capital's share and reducing the implied speed of convergence to match data
Mankiw, Romer, and Weil (1992) augmented the Solow model with human capital, which raises the effective capital share toward 2/3 and slows convergence speed, producing predictions more consistent with cross-country data.
Question 4: How do intellectual property rights (IPRs) affect innovation incentives in endogenous growth models?
- Stronger IPRs always reduce innovation by creating monopoly power
- Stronger IPRs increase the private return to innovation, encouraging R&D, but may also slow diffusion of existing knowledge (Correct answer)
- IPRs are irrelevant because knowledge is always freely available
- IPRs only affect innovation in developing countries
Correct answer: Stronger IPRs increase the private return to innovation, encouraging R&D, but may also slow diffusion of existing knowledge
In Romer-style models, patent protection is necessary for innovators to recoup R&D costs, but excessive protection can slow growth by restricting access to existing ideas that are inputs into new innovation.
Question 5: What is the 'scale effect' in first-generation endogenous growth models, and why has it been criticized?
- Larger countries always have higher per-capita income
- A larger population or research workforce raises the long-run growth rate, contradicting evidence that growth rates haven't risen with rising R&D inputs (Correct answer)
- Scale effects predict that small open economies cannot grow
- The scale effect only applies to agricultural economies
Correct answer: A larger population or research workforce raises the long-run growth rate, contradicting evidence that growth rates haven't risen with rising R&D inputs
Models like Romer (1990) predict that more researchers means faster growth, implying accelerating growth over time as populations rise—but empirically, growth rates have been roughly stable despite large increases in R&D employment.
Question 6: In semi-endogenous growth models (Jones, 1995), what drives long-run per-capita growth?
- Policies that permanently increase the savings rate
- Population growth, because it expands the pool of researchers and sustains innovation despite diminishing returns to R&D (Correct answer)
- Government R&D subsidies that eliminate the scale effect
- Capital accumulation without diminishing returns
Correct answer: Population growth, because it expands the pool of researchers and sustains innovation despite diminishing returns to R&D
Jones's semi-endogenous model resolves the scale effect by introducing diminishing returns to R&D: only population growth can sustain long-run per-capita growth by continuously expanding the research workforce.
Question 7: Which empirical strategy do researchers use to establish a causal link between institutions and long-run income levels?
- OLS regression of income on an index of institutional quality
- Instrumental variables using settler mortality rates as an instrument for institutional quality (Acemoglu, Johnson, Robinson 2001) (Correct answer)
- Difference-in-differences comparing pre- and post-reform periods
- Event studies around democratic transitions
Correct answer: Instrumental variables using settler mortality rates as an instrument for institutional quality (Acemoglu, Johnson, Robinson 2001)
AJR (2001) used European settler mortality as an instrument for institutional quality, arguing that places where Europeans could settle safely developed inclusive institutions, while high-mortality colonies got extractive ones.
MEcon Master of Economics Master of Economics: Economic Growth 4
What does Kaldor's stylized fact that 'the capital-output ratio is roughly constant over time' imply for growth models?