Chapter

2:
Economic
Growth
KEY POINTS
Meaning and Measurement of
Economic Growth

Classical Theories of Economic

Development

Contemporary Theories of
Economic Development
2.1. Meaning and Measurement of Economic Growth

2.1.1. The 2.1.3.

2.1.2.
Definition and Approaches
Developmenta Measuring
for Economic
l Significance Economic
Growth and
of Economic Growth
Growth
Development
2.1.1. The Definition and Developmental Significance of
Economic Growth

Schaffner (2013):
• Economic growth is defined as an increase
in the capacity of an economy to produce
goods and services, compared from one
period of time to another. It is significant
for raising living standards, reducing
poverty, and creating employment
opportunities.
2.1.1. The Definition and Developmental Significance of
Economic Growth

Perkins et al. (2013):

• Economic growth refers to the increase in a
country's output of goods and services, which is
typically measured by GDP. It is crucial for
improving the quality of life and achieving
economic development goals.
2.1.1. The Definition and Developmental Significance of
Economic Growth

Todaro and Smith (2020):

• Economic growth is a steady process by
which the productive capacity of the
economy is increased over time to bring
about rising levels of national income. It is
essential for long-term development and
reducing poverty.
 2.1.2. Measuring Economic
Growth
Schaffner (2013):
• Growth is measured using indicators like Gross
Domestic Product (GDP), Gross National Income
(GNI), and per capita income. Adjustments for
inflation and purchasing power parity (PPP) are
also considered.
 2.1.2. Measuring Economic
Growth
Perkins et al. (2013):
• Common measures include GDP and GNI, both
nominal and real (adjusted for inflation). Growth
rates are also evaluated over different periods to
understand trends and cycles.
 2.1.2. Measuring Economic
Growth
Todaro and Smith (2020):
• Economic growth is typically measured by the
annual percentage increase in GDP or GNI. The use
of real GDP per capita provides a more accurate
picture of growth in relation to population changes.
Gross domestic product (GDP): is defined as
the total value of final goods and services
produced within a country’s borders over the
course of a year.
+ Final goods: consumption goods and capital
goods, as well as intermediaries (stored in the
warehouse at the end of fiscal year);
+ The difference between the intermediate and final
goods is called the activity’s value added
Nominal GDP: the total finally produced goods
and services is valued using the current price.

-> The increase in GDP can be due to either

the increased quantity of produced goods and
services or higher in the price level.
 Three ways to measure
GDP:
(i). Production method (value added): GDP is
measured as the total market value of all final
goods and services produced within a country in a
given period of time.
GPD = sum of value added at all stages of
production.
This method used to exclude intermediaries.
Value added is the market value of the firms’
output –the value of intermediaries used for
 Three ways to measure GDP:

(ii). Expenditure method: GDP is measured

as the total expenditure on domestically
produced final goods and services.
GDP = C + I +G+NX
 Three ways to measure GDP:
(iii). Income method: GDP is measured as the total
income earned by domestically located factors of
production.
GDP = compensation of workers+ Rents+ Interests+
Proprietors’ incomes +Corporate’s profits+Indirect
Business taxes + Depreciation - Receipts of factor
incomes from oversea+ Payments of factor incomes
to foreigners.
Gross national product (GNP), also called
gross national income (GNI): is the value of
final goods and services produced by
domestic factors of production, no matter
where they are domiciled.
• The distinction between GDP and GNP
can be significant when countries’ labor
or capital cross national borders to
engage in production.
• In developing nations, many activities are
not included in GDP, which seems to
underestimate seriously the nation’s GDP.
2.1.3. Approaches for Economic Growth and
Development
Schaffner(2013):
• Emphasizes the role of capital
accumulation, technological innovation,
and institutional frameworks in driving
economic growth. Policies promoting
education, infrastructure, and
investment are crucial.
2.1.3. Approaches for Economic Growth and
Development

Perkins et al. (2013):

• Discusses various approaches including
industrialization, structural
transformation, and the integration of
markets. Importance of macroeconomic
stability and sound fiscal policies are
highlighted.
2.1.3. Approaches for Economic Growth and
Development

Todaro and Smith (2020):

• Highlights different approaches such as
the role of government intervention,
market-led growth, and the importance
of foreign aid and trade policies in
promoting economic growth.
 The rule 72
This useful mathematical approximation tells us that
to estimate roughly how many years it takes to
double income per capita when the annually
compounded growth rate is g percent, we simply
divide the number 72 by g.
For example: A country experiences an economic
growth rate of 3% per year, how many years later the
country will double its growth rate?
Expected years to double the growth rate = 72/3 =24
(years)
 2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model
• Schaffner (2013): The model emphasizes the
importance of saving and investment for economic
growth. It posits that growth rate depends on the
ratio of national saving to the capital-output ratio
• Perkins et al. (2013): The Harrod-Domar model
focuses on the dual role of savings and investment in
growth, highlighting the potential for both rapid
growth and instability due to rigid assumptions
2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model
• Todaro and Smith (2020): This model is used to
show the relationship between growth, savings, and
capital formation, emphasizing the need for
substantial investment to achieve sustainable
growth.
• Capital formation means the capital-output ratio.
 2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model (cont)
a. Asumption:
(1)Technology level is fixed;
(2) K and L are the only important inputs to production;
(3) The capital-output ratio (c) is fixed;
(4) Capital stock (K) is increased through investment (which
is financed by local saving (a fixed proportion s of the
people saving);
(5) Labor is abundant relative to capital-> the current stock
of capital is too small to provide productive employment for
all workers, so the output is the function of K only.
 2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model (cont)
b. The model of economic growth
-Net saving: S = s*Y (1)
-Net investment is the change in capital stock
I = ∆K (2)
Because the capital-output ratio:
(K/Y) = c or (∆K/ ∆Y) = c
-> ∆K = c* ∆Y (3)
(1/c) is a measure of the efficiency of capital utilization.
-Net saving equals to investment:
I=S (4)
 2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model (cont)
b. The model of economic growth
From (1), (2), (3) and (4), we have:
S = c*Y = c* ∆Y = ∆K = I (5)
Or simply as: s*Y = c* ∆Y (6)
Dividing both sides of Equation (6) first by Y and then by
c,
we obtain the following expression:
(∆Y/Y) = (s/c) or g = (s/c) (7)
(∆Y/Y) = g is the rate of economic growth.
 2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model (cont)
b. The model of economic growth
From (8) -> To grow, economies must save and invest a certain
proportion of their GDP;
But the actual rate at which they can grow for any level of
saving and investment—how much additional output can be
gained from an additional unit of investment—can be measured
by the inverse of the capital-output ratio (ICOR), c, because this
inverse, 1/c, is simply the output-capital or output-investment
ratio.
 2.2. Classical Theories of Economic
Development
c. The model’s
2.2.1. implications: Growth Model (cont)
The Harrod-Domar
-In the absence of government, the growth rate of national
income will be directly or positively related to the saving ratio
-> to grow, economies must save and invest a certain
proportion of their GDP.
-But how much additional output produced from an additional
unit of investment can be measured by the inverse of the
capital-output ratio (1/c) or the efficiency of the capital
utilization
-> lower c -> g depends upon the efficiency with which
 2.2. Classical Theories of Economic Development
2.2.1. The Harrod-Domar Growth Model (cont)
d. The model’s obstacles and constraints:
-Most poor countries have the relatively low level
of saving, so the relatively low level of new capital
formation;
-The model is lacking of complementary factors
such as managerial competence, skilled labors,
and the ability to plan and administer a wide
assortment of development projects.
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development

[Link]:
(1)The dualistic economy is composed of 2 sectors:
subsistence sector and capitalist sector;
(2) The structural change for economic growth is a
shifting of unproductive labor out of the subsistence
sector into the modern sector (the same labor can take
productive employments) as physical capital
accumulation creates new jobs;
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
a. Assumption (cont)
(3) The subsistence sector: + is in traditional agriculture
and handicrafts and services (with no potential to grow);
+ the production function is of only labor and land; wage
is fixed and paid based on the marginal product of zero =
APL;
no saving;
+ The redundant workers are willing to work for the
modern sector as being offered a wage equal to the
subsistence wage plus some premium to compensate
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
a. Assumption (cont)
(4)The small capitalist sector: + the production is a function
of capital and labor -> K accumulation is the potential to
drive growth;
+ this sector is considered as commercial agriculture and
modern manufacturing;
+ K and L subject to diminishing marginal returns;
+ the capitalists save and reinvest all of their profits;
+ the capitalists hire the labor quantity at which the value of
the marginal product of labor (VMPL) equals to the
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
b. The Lewis model:
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
b. The Lewis model (cont):
b1. The unchanging agricultural sector (figure b):
-The production function: TPA is only a
function of variable input labor (LA); fixed K
and Tech;
- underdeveloped economy with much of the
population lives and works in rural areas.
- TPA curve is horizontal beyond LA workers.
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
b. The Lewis model (cont):
b2. The capitalist sector (figure a):
- D is the labor demand curve; the labor supply
(perfectly elastic) curve is WM SL ;
-The intersection of the solid labor demand (D)
curve with the horizontal wage line identifies
the initial profit-maximizing level of employment
in the modern sector (L1);
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
b. The Lewis model (cont):
b2. The capitalist sector (figure a):
-A move to the right of the graph signifies a
structural change, in which a share of labor in the
traditional sector (MPL=0) declines -> a share of
labor in the modern sector (MPL>0) rises -> an
increase in the overall capitalist profits;
-The economy’s total production value = the modern
sector’s production value+ the traditional sector’s
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
c. The Lewis model’s implication:
-The existence of surplus labor causes the
pull of a rising capitalist sector -> increases
in the economy’s saving and investment;
-In labor-surplus economies, the rate of
growth increases over time as the share of
the capitalist sector in the total value of
production rises;
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
c. The Lewis model’s implication:
-Countries that are further along in structural
transformation grow more rapidly than others, until
labor surplus is exhausted (wages begin to rise and
profit rate and investment fall-> increase in saving and
investment.
-The capitalists should be provided with added
incentives to expand their production and profits.
-Encouraging the expansion of import-competing
manufacturing enterprises (FDI) by using tariff
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
d. The Lewis model’s constraints:
-A neglect of agriculture in the pursuit of
growth and development due to the fact
that it is assumed to have no growth
potential;
-Low wage level is only in the early stage of
development, then more rapid increases in
wages after growth has eliminated surplus
2.2. Classical Theories of Economic Development
2.2.2. The Lewis model of labor-surplus dualistic development
d. The Lewis model’s constraints (cont):
-Diminishing marginal returns -> not
increasing K accumulation for unlimited
duration;
-There is little surplus labor in rural
locations;
-The model assumes away the significance
of accounting for the importance of human
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
[Link]:
(1)The production function follows constant
returns to scale as the Harrod-Domar model;
(2)The capital-output and capital-labor ratios
are not fixed, which depend on the relative
endowments of capital and labor in the
economy and production process;
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
[Link] (cont):
(3) The production function (y=f(k)) has the property of
diminishing returns to capital. -> given labor quantity,
if the workers are given more machine, the additional
output produced from the new machine gets smaller
and smaller
-> slope of the curve declines as the capital
accumulation increases.
(4) Technology plays an important role on economic
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model:
-The production function per worker: y = f(k) (1)
shows that the capital per worker is fundamental in
output per worker;
-The changes in capital per worker: ∆k = sy- (n+d)k
(2)
∆k is determined by 3 things:
+ saving per worker (sy): sy↑-> investment per worker
(i)↑
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
+ If ∆k>0 -> k is rising; If ∆k<0 -> k is falling; If
∆k=0 is the steady-state equilibrium.
So, the economy with a high saving rate can easily
deepen its capital base and rapidly expand its
capital per worker, thus providing the basis for the
output growth.
- The relation of saving and growth is not linear
because of diminishing returns to capital in
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
The saving function has the same shape as
the production function, but is shifted
downward by the factor s ;
The line (n+d)k represents the amount of
new capital needed as result of growth in the
labor force and depreciation to keep k
constant.
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
At k< ko: the economy keeps shifting to the right
as long as the sy curve is above the (n+d)k curve
until reaches point A;
-At k>ko: the economy shifts to the left as long as
the sy curve is under the (n+d)k curve until
reaches point A.
-At point A, k remains constant -> A is the steady
state of the Solow model (potential level of
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
•Changes in the saving rate (s):
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
•Changes in the saving rate (s):
sy↑-> the sy curve shifts up-> the economy shifts to
B point.
The economy with higher saving rate will have a
higher income growth rate or better living standard,
but only in temporary.
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
•Changes in population growth rate (n):
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
•Changes in population growth rate (n):

n↑-> the (n+d)k curve rotates to

the left-> the economy shifts to C
point.
The economy with more workers
will have a lower k, lower sy and
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont):
•Changes in technology:
Technology progress is a key driver of productivity
growth.
In developing nations, the productivity-enhancing effects
of tech innovation is less than in developed ones due to
less improvements in physical infrastructure, labor force
education, regulatory environments and incentives, etc,.
Technology is put into the model in terms of the
efficiency and productivity of labor force (E) or human
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont) - Changes in technology:

-The Solow model: Y = F(K, E*L)

E*L is the amount of effective units of labor, which
measures both the amount of labor and its efficiency of
the production process.
Denote: ∆E/E = θ
If the workforce grows at n, the growth in the effective
supply of labor is n+ θ
The output per effective worker ye = Y/(E*L); the capital
per effective worker ke =K/(E*L)
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont) - Changes in technology:
The production function: ye = f(ke) and saving per effective
worker s*ye.
-The capital accumulation equation:
∆ke = s*ye – (n+d+θ)ke
(n+d+θ)ke> (n+d)k -> more capital is needed to keep ke
constant.
-At the steady state: The output per effective worker is
constant, rather than output per worker.
gY = n+θ
gy = θ
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
b. The Solow growth model (cont) - Changes in technology:
2.2. Classical Theories of Economic Development
2.2.3. The Solow growth model
c. The Solow growth model’s Implications for
developing countries:
• Saving is important in temporary;
• Acquiring the new technology from developed ones
and adapting it to local circumstances is probably
most cost-effective way;
• In order for the entrepreneurs to apply new
technology, the government should invest in
education, physical infrastructure, improve public
institutions to protect property rights;
2.3. Contemporary theories of
economic development

2.3.1. Endogenous Growth Model

2.3.2. Poverty Trap and Middle-Income
Trap.
2.3. Contemporary theories of economic
development
2.3.1. Endogenous
Schaffner Growth
(2013): Endogenous Model
growth theory emphasizes the role of
knowledge, innovation, and human capital as internal factors driving
•
economic growth. It argues that policy measures can have a
significant impact on long-term growth.

Perkins et al. (2013): Focuses on how investment in human capital,

• innovation, and knowledge contribute to economic growth, with
returns to scale and externalities playing a crucial role.

Todaro and Smith (2020): This theory challenges the notion of

diminishing returns, suggesting that increasing returns to scale and
•
positive externalities from investment in R&D and human capital can
sustain long-term growth.
2.3. Contemporary theories of economic
development
2.3.1. Endogenous
a. Assumptions:
Growth Model
(1) The economists were unsatisfied with Solow’s
ideas that technology is determined outside the
model;
(2) The economies follow increasing returns to scale;
(3) Productivity advance is a byproduct of
investment in physical or human capital and the
outcome of purposeful research, development, and
technology transfer activities;
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model

a. Assumptions (cont):
(4) Capital accumulation includes physical and
human capital;
(5) Investors have exclusive rights to use their
new ideas;
(6) Policies and institutions play an encouraging
roles in investment, innovation and economic
growth.
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
b. The Lucas’ model: productivity advance as a
byproduct of investment in physical or human
capital.
-The productivity level A is an outcome of a
person’s investment in physical or human
capital, which has positive externalities on the
productivity of other workers and producers
throughout the economy.
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
b. The Lucas’ model (cont):
A(H): the level of productivity depends on the
aggregate stock of human capital in the
economy;
If holding A constant, Y exhibits constant returns
to scale on K, H and L;
Increasing H leads to increase in A -> the
whole economy is characterized by increasing
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model: productivity advance as the
outcome of purposeful research, development, and
technology transfer activities.
The productivity level A is the outcome of intentional
efforts to develop or adopt new tech. The currently
developed nations are tech leaders, which produce
cutting-edge techs; and the currently less-developed
ones are tech followers, which acquire or adopt techs
developed by tech leaders.
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech leaders:
The new tech developed through research and
development may be freely copied.
Two uses of labor in the economy: final goods
production and efforts to improve tech through
education.
+ Total final goods production is shaped by the
production function:
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech leaders (cont): Y = F(K, ALY)
K: physical and human capital;
LY : the quantity of labor devoted to final goods
production;
A: the cumulative result of past research and
development activities (total number of ideas) -> the
blueprints for the production of new intermediate
capital goods (new digital devices and software) used
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech leaders (cont):
+ The central equation of the model – the
production function for technological change:
Ᾱ = v(LA , A) LA
Where: Ᾱ: the rate of creation of new ideas;
LA is the labor quantity devoted to research and
development activities;
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech leaders (cont):
v(.) represents the productivity of labor in production
of new ideas.
v(.)is a declining function of LA if larger number of
researchers are more likely to duplicate one another’s
efforts -> a smaller output of ideas per research
worker;
v(.) is an increasing function of A if researchers
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech leaders (cont):
Investors may either use the ideas to
produce and sell the new intermediate
goods themselves, or they may sell the use
of the ideas to specialized intermediate
goods producers;
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech leaders (cont):
Exclusive use rights give producers of each
intermediate goods monopoly power and
monopoly profits in their sales to producers of
final goods
-> providing motivation for investment in
research.
The more labor devoted to research, the lower is the
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
c. The Romer’s model (cont):
-Growth in tech followers:
The challenges of adopting new technologies can
include the need to achieve high enough levels of
human capital for operating the tech successfully,
the need to find funds to purchase the tech from a
foreign inventor, and the need to convince the
foreign inventor that its patent-based monopoly
power over the idea will be protected within the tech
2.3. Contemporary theories of economic development
2.3.1. Endogenous Growth Model
d. The models’ implications:
(1)Well – designed government interventions might
enhance private individuals to invest in new tech;
(2)The patent-based monopoly power over the idea
will be protected;
(3) to reinforce interest in human capital investment;
(4)Protection of intellectual property rights in
developing countries;
(5)Openness to international trade is important.
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap
Schaffner (2013): Poverty traps describe situations where poor
countries cannot achieve growth due to self-reinforcing mechanisms
• like low savings and inadequate infrastructure. The middle-income trap
refers to countries that grow rapidly to a certain level but then
stagnate.

Perkins et al. (2013): Discusses how structural barriers, inadequate

• institutions, and lack of innovation can prevent countries from escaping
poverty or advancing beyond middle-income status.

Todaro and Smith (2020): Explains the mechanisms of poverty traps

and middle-income traps, emphasizing the importance of inclusive
•
growth, institutional development, and innovation policies to overcome
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap
a. Macro poverty traps:
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap

a. Macro poverty traps (cont):

The economies are populated by large
numbers of producers, each of whom faces a
choice between two alternative actions:
+ to continue producing with low-productivity
methods or to undertake investment allowing
them
+ to produce using higher-productivity
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap

a. Macro poverty traps (cont):

• Movements to the right signify increases in
the economy’s level of Investment and in
the level of income per capita achieved
after investment.
• Movements to the left end is thus
associated with poverty and stagnation,
while the right end is associated with
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap

a. Macro poverty traps (cont):

-The economies face the potential of falling
onto a macro poverty traps if the investment
returns perceived by any one producer are
related to the investment choices of others.
-The slope of the investment returns schedule
is positive, indicating complementarity among
investment decisions.
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap

a. Macro poverty traps (cont):

-Dual equilibria: the economy could settle down
into two very different equilibrium levels of
investment and prosperity, no forces create
any tendency for change.
-Bad equilibria: at the leftmost end -> no
producer invests.
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap

b. Micro poverty traps:

If investments that can raise productivity and
income are profitable only when undertaken at
a scale above some minimum threshold, then
only investors with adequate financing for
undertaking sufficiently large investments can
hope to profit from investment.
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap

b. Micro poverty traps (cont):

Information problems in credit markets
(relating to lenders’ inability to fully assess
borrowers’ abilities and motivations or to fully
monitor and supervise their use of credit) can
cause lenders (such as banks) to offer credit
only in proportion to the collateral that a
borrower has to offer.
2.3. Contemporary theories of economic development
2.3.2. Poverty Trap and Middle-Income Trap
b. Micro poverty traps (cont):
The poor, who lack collateral (and lack savings,
with which they could avoid the need to borrow
for investment), are likely to find investments
of adequate size infeasible and thus choose not
to invest.
Their incomes remain stagnant, even while the
wealthy around them invest profitably and
enjoy growing incomes.
Questions for discussion:
[Link] are the main features of classical and
neoclassical growth theories, and how do they explain
economic growth?
[Link] does the Solow-Swan model address the
differences in growth rates between developed and
developing countries?
[Link] the role of human capital and technological
change in the neoclassical growth model. How do these
factors influence long-term growth?
4. What are the main contributions of endogenous
THANK
YOU