International Trade the World Economy Charles van Marrewijk

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk Introduction Paul Romer (1955 - )

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk Modeling new goods The variety approach

International Trade & the World Economy; Charles van Marrewijk Modeling new goods The quality approach

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk Kaldor's stylized facts of economic growth Nicholas Kaldor (1961) suggested the following list of stylized facts: • The continued growth in the aggregate volume of production and in the productivity of labor at a steady trend rate. • A continued increase in the amount of capital per worker. • A steady rate of profit on capital. • Steady capital-output ratios over long periods. • A steady investment coefficient, and a steady share of profits and wages.

International Trade & the World Economy; Charles van Marrewijk Kaldor's stylized facts of economic growth

International Trade & the World Economy; Charles van Marrewijk Kaldor's stylized facts of economic growth

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk The neo-classical model and the Solow residual

International Trade & the World Economy; Charles van Marrewijk The neo-classical model and the Solow residual

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk Empirical pictures

International Trade & the World Economy; Charles van Marrewijk Empirical pictures

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk Endogenous growth Paul Romer’s (1994) list of stylized facts: • There are many firms in a market economy. • Discoveries differ from other inputs in that many people can use them at the same time (nonrival goods). • It is possible to replicate physical activities. • Technological advance comes from things that people do. • Many individuals and firms have market power and earn monopoly rents on discoveries.

International Trade & the World Economy; Charles van Marrewijk Endogenous growth Production function: Operating profit for manufactures producer Future profits discounted; profits erode if number of varieties increases Inventing new variety represents fixed cost; with knowledge spillovers economy steadily grows forever; growth rate higher if: • the labor force is higher (increasing returns to scale ensure that size is important) • the fixed costs of investment F are lower, and • the discount rate is lower.

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk An experiment in geographical economics Experiment w. 12 city racetrack; Herfindahl = measure of agglomeration

International Trade & the World Economy; Charles van Marrewijk An experiment in geographical economics

International Trade & the World Economy; Charles van Marrewijk CHAPTER 16; NEW GOODS, GROWTH & DEVELOPMENT Introduction Modeling new goods Kaldor's stylized facts of economic growth The neo-classical model and the Solow residual Empirical pictures Endogenous growth An experiment in geographical economics Conclusions

International Trade & the World Economy; Charles van Marrewijk Conclusions Rising per capita income is relatively new phenomenon. Some countries have experienced relatively steady growth, others long periods of stagnation and rapid increases. Neo-classical model based on capital accumulation needs exogenous technological change to ‘explain’ growth; large Solow residual. Endogenous growth models based on imperfect competition and innovation (new goods and/or quality improvements) led by entrepreneurs in search of profits. Large swings in economic prosperity may be explained by geographical economics model.