short answer EC307 laurier

Question 1: 2 Growth models
 Romer model
 AK model
 Relationship between the 2 with the solow growth model
o Compare with solow growth model
Romer Model of learning by doing and knowledge spillover
 g – n = βn/1 – α – β
o assumptions
o derive the growth equation
AK model
 Y = AK
 Change in k/k = sA – sơ – n
Exogenous vs endogenous growth model
 Comparison between solow growth model and Romer model
Question 2: figuring out how productivity impacts economic growth
 Technological progress and efficiency
 Chapter 7, 8, 10
Question 3: Openness and a mix of productivity and economic growth
Causes of Globalization
- Lower transportation costs
o Lead to greater economic integration
o Composition of output has shifted towards goods that are easier to transport
- Lower cost of transmission of information
o Faster flow of information
o Developed new types of trade
 Information based services
- Trade policy
 Regulates trade among 150-member countries
 Reduction of tariffs
 Created the World Trade Organization (WTO, 1995)
 Their purpose is to lower trade barriers around the world
o Allows countries to increase trade globally
The Effects of Openness on Economic Growth
- Measuring the degree of openness for a country
o The level of tariffs
o Manipulation of the exchange rate
o Government monopolies on exports
- Relationship between openness and economic growth
o When economy was closed and then became open, growth rate accelerated as a result
o Open economies have higher economic growth
- To determine whether being open to the world economy will cause a country to be rich, we take
three approaches:
o We look at how growth rates of income compare in open and closed countries
o Examine how growth rates change when countries become more open or less open
o Consider the impacts of geographic factors that effect a country’s openness
Compare the growth rates of income for closed and open economies
o Period: 1965-2000
 Average growth rate for the open economies: 3.1% per year
 Average growth rate for closed economies: 1.5% per year
o For closed economies, there is no relationship between initial level of GDP and the
subsequent growth rate of GDP
o For open economies, the relationship between initial GDP and growth rate of GDP is
 Evidence of income convergence
 Economies that have lower levels of GDP are growing at a faster rate compared
to rich countries
Examining how changes in growth rate when a country become more or less open
o Positive relationship between openness and economic growth
Geographical factors that contribute to economic growth
o The gravity model
Through which channel does openness affect economic growth?
2 channels:
o How does it impact factor accumulation
o How does it impact productivity
 Technology
 Efficiency
Factor Accumulation and economic growth
- Assume free mobility of capital
The relationship between saving rate and open economy
o GNP will be affected not GDP
Capital accumulation:
 A foreign firm buys or builds a facility in another country
o Portfolio investment
 Investors from a foreign country purchase stocks and bonds
Openness and Productivity
- The effects on technology
o Trade can be considered as technology transfer
- Trade allows a country to be more productive by allowing them to produce the goods it’s good
at and sell them to other countries in return for things it is not good at producing
o Countries trade because they are different from each other or to take advantage of
economies of scale in production
 Countries trade the goods for which they have lower opportunity cost of
 Comes from competitive advantage in terms of labor or resources
- Trade as a form of technology
- Theories of why trade occurs can be grouped into 3 categories: Efficiency and Openness
 Greater market access  Market size and distance between markets determine
how much countries buy and sell
 Transactions benefit both buyers and sellers
 More Competition  Differences in labor, labor skills, physical capital, natural
resources and technology creative productive advantages for countries
 Economies of scale in production  Economies of scale create productive
advantages for countries
 A larger scale is more efficient
- There are three ways in which economic openness contributes to higher level of technology:
technological progress and openness
o Countries that are open are more able to import existing technologies
o Countries can also purchase key inputs or capital goods that embody a new technology
from abroad
o There can also be transfer of softer technologies
 Tacit knowledge
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