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Open Economy and Endogeneous Growth
Sang Yoon (Tim) Lee
Universität Mannheim
April 13, 2015
last updated: April 12, 2015
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
1 / 19
This Week and Next
1
Open economy with global capital market
2
Open economy with technology transfers
3
Quick discussion of endogenous growth
4
Quick recap of growth models
5
Transition to a model of development
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
2 / 19
Primer to Open Economy
Using the Romer model, we will study technology transfers in an open
economy
A will be interpreted as some given world-wide technology frontier
Technology comes from some worldwide research sector, or one (or few)
leading research countries, with the other countries learning from the
countries ahead
But why care about an open economy...?
Even if we do, why technology rather than capital investment?
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
3 / 19
Growth of World Trade
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
4 / 19
Openness and Growth
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
5 / 19
Growth in Closed Economies: Independence
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
6 / 19
Growth in Open Economies: Convergence
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
7 / 19
Simplest Model of Convergence
1
Use the original Solow model
2
Instead of solving for the BGP in a closed economy, think about
international investment
3
World interest rate rW
This means all countries must satisfy
AL 1−α
= αkˆ α−1
α
K
1
α 1− α
rW
1
α 1− α
A(t)
rW
α
α 1− α
A(t)
rW
rW =
kˆ ∗ =
k∗ (t) =
y∗ (t ) =
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
8 / 19
Convergence in What?
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
9 / 19
Implications
1
Openness seems to be more about technology than capital
2
We will think of technology transfers as learning skills, or human capital
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
10 / 19
Translating Technology as Human Capital
Think again about Romer’s model, except
Technology comes from some worldwide research sector, or one or a few
leading research countries, with the other countries learning from the
countries ahead
A will be interpreted as some given world-wide technology frontier
skills are required to use the technologies
so the more skills that exist in an economy, the more types of
intermediate goods
people spend time learnings skills
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
11 / 19
Translating Technology as Human Capital
so aggregate capital is now
K (t) =
Z h(t)
0
xj (t)dj
and final goods production becomes
Y = [(1 − u)L]1−α
Z h
0
xjα dj = Kα [(1 − u)hL]1−α
Essentially, up to now, we’re just replacing the A with h
u is time spent learning, as before. Only now, it is time spend learning
how to use technologies
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
12 / 19
Human Capital as Technological Skills
Assume human capital growth as before, with a “technological” twist:
h˙ = ψuAβ h1− β
β
h˙
A
= ψu
h
h
means
technology itself isn’t sufficient for production - need the skills to use it
technology affects learning
as you advance toward learning higher technologies—i.e., as h
approaches A—it’s harder to learn
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
13 / 19
BGP in Human Capital as Technology Model
˙
On a BGP, h/h
must be constant, so
A and h grow at the same rate: g
so
u∗ =
Tim Lee (U Mannheim)
g
ψ
h0
A0
Economic Growth
β
April 13, 2015
14 / 19
BGP in Human Capital as Technology Model
Now the normalization is
kˆ =
K
h(1 − u)L
and the BGP solution is
kˆ ∗ =
∗
y (t) =
Tim Lee (U Mannheim)
s
n+g+δ
1
1− α
s
n+g+δ
α
1− α
ψu∗
g
Economic Growth
1
β
(1 − u∗ )A (t )
April 13, 2015
15 / 19
Some Conclusions
Nice framework, because
combines human capital and technology model
technology is freely traded in open economy, growth is due to differences
in skill rather than research
c.f. Of course, we can view it as a closed economy and incorporate a research
sector - that is your homework!
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
16 / 19
Endogenous Growth
We have studied two types of “endogenous growth” models
1
“Endogenous growth” is a class of models in which the BGP growth rate
depends on agents’ behavior
2
Human capital model: agents’ decision between work vs. education
3
Technological progress: agents’ decision between research vs. production
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
17 / 19
What causes endogenous growth?
Remember that
1
Human capital production function with endogenous growth:
h˙ = ψuh
2
⇒
h˙
= ψu
h
Technology model only have endogenous growth when φ = 1: otherwise,
the labor share in the research sector was irrelevant for long run growth
(however, it did have level effects!)
Why did one cause endogenous growth while the other didn’t?
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
18 / 19
Next Week
1
Review of Growth Models
2
Discussion of Development Model
Tim Lee (U Mannheim)
Economic Growth
April 13, 2015
19 / 19