MEcon Master of Economics Master of Economics: Economic Growth 5 — Questions and Answers
Question 1: What is 'club convergence' in the empirical growth literature?
- All countries converge to a single global steady state
- Multiple groups of countries each converging to their own distinct steady states, rather than a global one (Correct answer)
- Only OECD member countries exhibit convergence
- Convergence driven exclusively by trade club membership
Correct answer: Multiple groups of countries each converging to their own distinct steady states, rather than a global one
Club convergence (Durlauf & Johnson; Quah) refers to the pattern where economies stratify into distinct basins of attraction, with each club converging internally while diverging from other clubs.
Question 2: In a Schumpeterian growth model near the technology frontier, what happens to the optimal innovation strategy for follower countries?
- Followers should imitate more and innovate less as they approach the frontier
- Followers should shift from imitation toward frontier innovation as they catch up to avoid being leapfrogged (Correct answer)
- Followers always benefit from pure imitation regardless of their distance from the frontier
- The technology frontier is irrelevant for follower country strategies
Correct answer: Followers should shift from imitation toward frontier innovation as they catch up to avoid being leapfrogged
Aghion et al. show that countries far from the frontier benefit from imitation, but as they approach it, the risk of creative destruction by new entrants makes frontier innovation more valuable.
Question 3: What does the Uzawa-Lucas two-sector model predict about the allocation of human capital between goods production and education?
- All human capital should be devoted to goods production in the long run
- On the balanced growth path, a constant fraction of human capital is allocated to education, sustaining perpetual skill accumulation (Correct answer)
- Education investment declines as the economy grows richer
- The government must mandate educational investment to achieve a balanced growth path
Correct answer: On the balanced growth path, a constant fraction of human capital is allocated to education, sustaining perpetual skill accumulation
In the Uzawa-Lucas model, the optimal policy has households devoting a fixed share of their human capital stock to education, generating constant growth of human capital and thereby sustained GDP growth.
Question 4: How does international trade affect long-run growth in models with endogenous innovation?
- Trade always reduces growth by exposing domestic innovators to foreign competition
- Trade can raise growth by expanding the market for innovations, increasing returns to R&D investment (Correct answer)
- Trade is growth-neutral because the gains from trade are purely static
- Trade only affects growth through the current account balance
Correct answer: Trade can raise growth by expanding the market for innovations, increasing returns to R&D investment
Rivera-Batiz and Romer (1991) showed that integration of economies raises growth by enlarging the market over which innovators can earn returns, making R&D more profitable and thus increasing its equilibrium level.
Question 5: What is the significance of the 'factor share constancy' stylized fact (labor share ≈ 2/3) for growth model calibration?
- It implies a capital elasticity of output of approximately 1/3 in a Cobb-Douglas production function (Correct answer)
- It proves that capital and labor are perfect substitutes
- It rules out any role for total factor productivity in accounting for growth
- It shows that human capital has no effect on wages
Correct answer: It implies a capital elasticity of output of approximately 1/3 in a Cobb-Douglas production function
A constant labor share of ~2/3 in a competitive Cobb-Douglas framework implies the capital exponent α ≈ 1/3, which is a standard calibration target that shapes predictions about convergence speed and capital's contribution to growth.
Question 6: In models with directed technical change (Acemoglu, 2002), the market direction of innovation is determined by:
- Government-mandated research priorities
- The relative profitability of innovating for different factor-using technologies, which depends on factor prices and market sizes (Correct answer)
- Exogenous technological shocks that cannot be influenced by economic incentives
- The depreciation rate of existing capital
Correct answer: The relative profitability of innovating for different factor-using technologies, which depends on factor prices and market sizes
Acemoglu's directed technical change shows innovators choose which factor-augmenting technology to develop based on profit incentives: a factor's price effect (higher wage → more profit from labor-augmenting tech) and market size effect (more workers → bigger market).
Question 7: What is the main challenge of using growth accounting to measure total factor productivity (TFP) growth?
- Growth accounting cannot be applied to economies with more than two inputs
- TFP is computed as a residual and captures not only true technology but also measurement error, omitted inputs, and returns to scale (Correct answer)
- Growth accounting requires panel data that is unavailable for developing countries
- TFP growth is always negative due to environmental degradation
Correct answer: TFP is computed as a residual and captures not only true technology but also measurement error, omitted inputs, and returns to scale
Abramovitz called TFP the 'measure of our ignorance' because the Solow residual absorbs all output growth not explained by measured inputs, conflating genuine productivity improvements with mismeasurement and omitted variable bias.
MEcon Master of Economics Master of Economics: Economic Growth 5
What is 'club convergence' in the empirical growth literature?