TOPIC 5: Growth and Classic Models

Vocabulary flashcards covering key concepts from the lecture on Growth and Classic Models, including production functions, determinants of economic growth, types of technological progress, and foundational growth models like Rostow's Stages and the Harrod-Domar model.

Economic growth

Change in total value of production between time periods, fundamentally tied to underlying production processes.

Production function

A description of the production process at both the macro and micro level, commonly represented as Q = f(K, L) or Y = f(K, L).

Marginal product of a factor of production

The additional output generated by adding one more unit of a factor of production (e.g., labor or capital).

Capital Accumulation

All new investments in land, physical equipment, and human resources, resulting from the diversion of present income into savings that is invested to augment future output.

Population Growth

A determinant of economic growth that affects the size of the labor force; additional labor increases total production at the micro level, but this relationship may reverse at the macro level with large increases.

Technological progress

The most important factor in long-term economic growth, defined as the increased application of new scientific knowledge in the form of inventions and innovations concerning human and physical capital.

Neutral technological progress

Technological change where higher output levels are achieved with the same quantity and combinations of factor inputs, without affecting the relative marginal productivity of either input, e.g., division of labor.

Factor Saving Technological Progress

Technology that allows either capital or labor to substitute for the other, enabling a country to achieve a given output level using less of one factor in exchange for more of the other.

Labor saving technology

Allows a country to achieve a given output level by using less labor in exchange for more capital, common in developed countries where labor is expensive.

Capital saving technology

Allows a country to achieve a given output level by using less capital in exchange for more labor, useful in developing countries where labor is cheaper.

Factor Augmenting Tech Progress

Technology that increases the marginal product of a given factor of production, potentially changing the ratio of inputs in equilibrium.

Labor augmenting

Improvements in human capital, such as education or health, increasing the marginal product of labor.

Capital augmenting

Improvements that make capital more productive, such as the development of iron to substitute for bronze in metal products.

Classic Growth Models

A category of growth models focused on achieving higher levels of production through capital deepening, including linear-in-stages and structural change models.

Neoclassical Growth Models

A category of growth models focused on developing efficient markets, driven by fundamental theorems of market equilibrium.

Modern Growth Models

A category of growth models that focus on the functioning of markets in more detail, with special emphasis on situations where necessary conditions for the Efficient Market Hypothesis are violated.

Linear-in-Stages Models

A type of classic growth model, popular in the 1950s-1960s, which views development as a progression through a series of universal, necessary stages of progress, emphasizing capital accumulation.

Rostow’s Stages of Growth

A linear-in-stages model proposed by Walter Whitman Rostow, positing five stages of development: Traditional Society, Pre-conditions stage, Take-off, Drive to Maturity, and Age of High Mass Consumption.

Harrod-Domar Model

A classic growth model that explains how a country can generate growth through capital accumulation, with its key mechanism being capital accumulation through investments created by saving.

K_t (Capital stock)

The total amount of capital available in an economy for a given period t.

Y_t (National income)

The total output or income generated in an economy for a given period t.

c (capital-output ratio)

In the Harrod-Domar model, the constant ratio representing the amount of capital necessary to create a given level of output (income).

S_t (Savings)

The amount of income saved in a given period t, in the Harrod-Domar model.

s (saving rate)

In the Harrod-Domar model, the fraction of national income that is saved for the next period.

I_t (Investment)

The amount of savings from period t that is invested to increase capital stock in the next period, in the Harrod-Domar model.