Table Of ContentIntroduction to Modern
Economic Growth: Parts 1-5
Daron Acemoglu
Department of Economics,
Massachusetts Institute of Technology
Contents
Preface xi
Part 1. Introduction 1
Chapter 1. Economic Growth and Economic Development:
The Questions 3
1.1. Cross-Country Income Differences 3
1.2. Income and Welfare 6
1.3. Economic Growth and Income Differences 10
1.4. Origins of Today’s Income Differences and World Economic Growth 12
1.5. Conditional Convergence 16
1.6. Correlates of Economic Growth 20
1.7. From Correlates to Fundamental Causes 22
1.8. The Agenda 25
1.9. References and Literature 27
Chapter 2. The Solow Growth Model 31
2.1. The Economic Environment of the Basic Solow Model 32
2.2. The Solow Model in Discrete Time 40
2.3. Transitional Dynamics in the Discrete Time Solow Model 50
2.4. The Solow Model in Continuous Time 55
2.5. Transitional Dynamics in the Continuous Time Solow Model 59
2.6. Solow Model with Technological Progress 66
2.7. Comparative Dynamics 76
2.8. Taking Stock 78
2.9. References and Literature 79
2.10. Exercises 80
Chapter 3. The Solow Model and the Data 87
3.1. Growth Accounting 87
3.2. Solow Model and Regression Analyses 90
3.3. The Solow Model with Human Capital 98
3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 104
3.5. Calibrating Productivity Differences 113
3.6. Estimating Productivity Differences 118
3.7. Taking Stock 123
3.8. References and Literature 125
3.9. Exercises 126
Chapter 4. Fundamental Determinants of Differences in Economic Performance 129
4.1. Proximate Versus Fundamental Causes 129
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Introduction to Modern Economic Growth
4.2. Economies of Scale, Population, Technology and World Growth 133
4.3. The Four Fundamental Causes 136
4.4. The Effect of Institutions on Economic Growth 147
4.5. What Types of Institutions? 164
4.6. Disease and Development 167
4.7. Political Economy of Institutions: First Thoughts 170
4.8. Taking Stock 171
4.9. References and Literature 171
4.10. Exercises 174
Part 2. Towards Neoclassical Growth 177
Chapter 5. Foundations of Neoclassical Growth 179
5.1. Preliminaries 179
5.2. The Representative Household 182
5.3. Infinite Planning Horizon 188
5.4. The Representative Firm 190
5.5. Problem Formulation 192
5.6. Welfare Theorems 193
5.7. Sketch of the Proof of the Second Welfare Theorem, Theorem 5.7* 201
5.8. Sequential Trading 203
5.9. Optimal Growth in Discrete Time 207
5.10. Optimal Growth in Continuous Time 208
5.11. Taking Stock 209
5.12. References and Literature 210
5.13. Exercises 211
Chapter 6. Dynamic Programming and Optimal Growth 215
6.1. Brief Review of Dynamic Programming 216
6.2. Dynamic Programming Theorems 220
6.3. The Contraction Mapping Theorem and Applications* 224
6.4. Proofs of the Main Dynamic Programming Theorems* 229
6.5. Fundamentals of Dynamic Programming 236
6.6. Optimal Growth in Discrete Time 245
6.7. Competitive Equilibrium Growth 250
6.8. Taking Stock 252
6.9. References and Literature 253
6.10. Exercises 254
Chapter 7. Review of the Theory of Optimal Control 259
7.1. Variational Arguments 260
7.2. The Maximum Principle: A First Look 268
7.3. Infinite-Horizon Optimal Control 273
7.4. More on Transversality Conditions 283
7.5. Discounted Infinite-Horizon Optimal Control 285
7.6. Existence of Solutions 290
∗
7.7. A First Look at Optimal Growth in Continuous Time 291
7.8. The q-Theory of Investment 292
7.9. Taking Stock 297
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Introduction to Modern Economic Growth
7.10. References and Literature 299
7.11. Exercises 301
Part 3. Neoclassical Growth 307
Chapter 8. The Neoclassical Growth Model 309
8.1. Preferences, Technology and Demographics 309
8.2. Characterization of Equilibrium 313
8.3. Optimal Growth 317
8.4. Steady-State Equilibrium 318
8.5. Transitional Dynamics 320
8.6. Technological Change and the Canonical Neoclassical Model 323
8.7. Comparative Dynamics 329
8.8. The Role of Policy 330
8.9. A Quantitative Evaluation 332
8.10. Extensions 335
8.11. Taking Stock 336
8.12. References and Literature 337
8.13. Exercises 337
Chapter 9. Growth with Overlapping Generations 345
9.1. Problems of Infinity 346
9.2. The Baseline Overlapping Generations Model 348
9.3. The Canonical Overlapping Generations Model 353
9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the
Overlapping Generations Model 355
9.5. Role of Social Security in Capital Accumulation 358
9.6. Overlapping Generations with Impure Altruism 360
9.7. Overlapping Generations with Perpetual Youth 364
9.8. Overlapping Generations in Continuous Time 368
9.9. Taking Stock 374
9.10. References and Literature 376
9.11. Exercises 377
Chapter 10. Human Capital and Economic Growth 383
10.1. A Simple Separation Theorem 383
10.2. Schooling Investments and Returns to Education 386
10.3. The Ben-Porath Model 387
10.4. Neoclassical Growth with Physical and Human Capital 392
10.5. Capital-Skill Complementarity in an Overlapping Generations Model 397
10.6. Physical and Human Capital with Imperfect Labor Markets 401
10.7. Human Capital Externalities 406
10.8. Nelson-Phelps Model of Human Capital 408
10.9. Taking Stock 411
10.10. References and Literature 413
10.11. Exercises 414
Chapter 11. First-Generation Models of Endogenous Growth 417
11.1. The AK Model Revisited 418
11.2. The AK Model with Physical and Human Capital 424
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11.3. The Two-Sector AK Model 426
11.4. Growth with Externalities 430
11.5. Taking Stock 434
11.6. References and Literature 435
11.7. Exercises 436
Part 4. Endogenous Technological Change 443
Chapter 12. Modeling Technological Change 445
12.1. Different Conceptions of Technology 445
12.2. Science and Profits 449
12.3. The Value of Innovation in Partial Equilibrium 452
12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 459
12.5. Individual R&D Uncertainty and the Stock Market 466
12.6. Taking Stock 468
12.7. References and Literature 468
12.8. Exercises 470
Chapter 13. Expanding Variety Models 473
13.1. The Lab Equipment Model of Growth with Input Varieties 473
13.2. Growth with Knowledge Spillovers 485
13.3. Growth without Scale Effects 488
13.4. Growth with Expanding Product Varieties 491
13.5. Taking Stock 495
13.6. References and Literature 496
13.7. Exercises 497
Chapter 14. Models of Schumpeterian Growth 505
14.1. A Baseline Model of Schumpeterian Growth 506
14.2. A One-Sector Schumpeterian Growth Model 517
14.3. Innovation by Incumbents and Entrants and Sources of Productivity Growth 522
14.4. Step-by-Step Innovations* 539
14.5. Taking Stock 552
14.6. References and Literature 553
14.7. Exercises 555
Chapter 15. Directed Technological Change 563
15.1. Importance of Biased Technological Change 564
15.2. Basics and Definitions 567
15.3. Baseline Model of Directed Technological Change 570
15.4. Directed Technological Change with Knowledge Spillovers 585
15.5. Directed Technological Change without Scale Effects 589
15.6. Endogenous Labor-Augmenting Technological Change 591
15.7. Generalizations and Other Applications 594
15.8. An Alternative Approach to Labor-Augmenting Technological Change 595
15.9. Taking Stock 600
15.10. References and Literature 602
15.11. Exercises 604
Part 5. Stochastic Growth 611
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Introduction to Modern Economic Growth
Chapter 16. Stochastic Dynamic Programming 613
16.1. Dynamic Programming with Expectations 613
16.2. Proofs of the Stochastic Dynamic Programming Theorems* 621
16.3. Stochastic Euler Equations 626
16.4. Generalization to Markov Processes* 629
16.5. Applications of Stochastic Dynamic Programming 631
16.6. Taking Stock 639
16.7. References and Literature 640
16.8. Exercises 641
Chapter 17. Stochastic Growth Models 645
17.1. The Brock-Mirman Model 646
17.2. Equilibrium Growth under Uncertainty 651
17.3. Application: Real Business Cycle Models 659
17.4. Growth with Incomplete Markets: The Bewley Model 663
17.5. The Overlapping Generations Model with Uncertainty 667
17.6. Risk, Diversification and Growth 670
17.7. Taking Stock 689
17.8. References and Literature 690
17.9. Exercises 691
Part 6. Technology Diffusion, Trade and Interdependences 697
Chapter 18. Diffusion of Technology 701
18.1. Productivity Differences and Technology 701
18.2. A Benchmark Model of Technology Diffusion 704
18.3. Technology Diffusion and Endogenous Growth 713
18.4. Appropriate and Inappropriate Technologies and Productivity Differences 718
18.5. Contracting Institutions and Technology Adoption 727
18.6. Taking Stock 741
18.7. References and Literature 744
18.8. Exercises 745
Chapter 19. Trade and Growth 751
19.1. Growth and Financial Capital Flows 751
19.2. Why Doesn’t Capital Flow from Rich to Poor Countries? 757
19.3. Economic Growth in a Heckscher-Ohlin World 760
19.4. Trade, Specialization and the World Income Distribution 770
19.5. Trade, Technology Diffusion and the Product Cycle 784
19.6. Trade and Endogenous Technological Change 789
19.7. Learning-by-Doing, Trade and Growth 792
19.8. Taking Stock 796
19.9. References and Literature 799
19.10. Exercises 801
Part 7. Economic Development and Economic Growth 807
Chapter 20. Structural Change and Economic Growth 813
20.1. Non-Balanced Growth: The Demand Side 813
20.2. Non-Balanced Growth: The Supply Side 821
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20.3. Agricultural Productivity and Industrialization 835
20.4. Taking Stock 841
20.5. References and Literature 843
20.6. Exercises 844
Chapter 21. Structural Transformations and Market Failures in Development 849
21.1. Financial Development 851
21.2. Fertility, Mortality and the Demographic Transition 857
21.3. Migration, Urbanization and The Dual Economy 865
21.4. Distance to the Frontier and Changes in the Organization of Production 876
21.5. Multiple Equilibria From Aggregate Demand Externalities and the Big Push 886
21.6. Inequality, Credit Market Imperfections and Human Capital 894
21.7. Towards a Unified Theory of Development and Growth? 907
21.8. Taking Stock 912
21.9. References and Literature 913
21.10. Exercises 916
Part 8. Political Economy of Growth 925
Chapter 22. Institutions, Political Economy and Growth 931
22.1. The Impact of Institutions on Long-Run Development 932
22.2. Distributional Conflict and Economic Growth in a Simple Society 938
22.3. Distributional Conflict and Competition 951
22.4. Inefficient Economic Institutions: A First Pass 964
22.5. Distributional Conflict and Economic Growth: Concave Preferences* 969
22.6. Heterogeneous Preferences, Social Choice and the Median Voter* 975
22.7. Distributional Conflict and Economic Growth: Heterogeneity and the Median
Voter 995
22.8. The Provision of Public Goods: Weak Versus Strong States 1001
22.9. Taking Stock 1007
22.10. References and Literature 1011
22.11. Exercises 1014
Chapter 23. Political Institutions and Economic Growth 1023
23.1. Political Regimes and Economic Growth 1024
23.2. Political Institutions and Growth-Enhancing Policies 1029
23.3. Dynamic Tradeoffs 1034
23.4. Understanding Endogenous Political Change 1057
23.5. Dynamics of Political and Economic Institutions: A First Look 1069
23.6. Taking Stock 1086
23.7. References and Literature 1089
23.8. Exercises 1090
Chapter 24. Epilogue: Mechanics and Causes of Economic Growth 1095
24.1. What Have We Learned? 1095
24.2. A Possible Perspective on Growth and Stagnation over the Past 200 Years 1100
24.3. Many Remaining Questions 1111
Part 9. Mathematical Appendices 1115
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Introduction to Modern Economic Growth
Chapter A. Odds and Ends in Real Analysis and Applications to Optimization 1117
A.1. Distances and Metric Spaces 1118
A.2. Mappings, Functions, Sequences, and Continuity 1121
A.3. A Minimal Amount of Topology: Continuity and Compactness 1126
A.4. The Product Topology 1131
A.5. Correspondences and Berge’s Maximum Theorem 1134
A.6. Convexity, Concavity, Quasi-Concavity and Fixed Points 1138
A.7. Differentiation, Taylor Series and the Mean Value Theorem 1142
A.8. Functions of Several Variables and the Inverse and Implicit Function Theorems1145
A.9. Separation Theorems 1149
A.10. Constrained Optimization 1153
A.11. Exercises 1156
Chapter B. Review of Ordinary Differential Equations 1161
B.1. Review of Eigenvalues and Eigenvectors 1161
B.2. Some Basic Results on Integrals 1162
B.3. Linear Differential Equations 1164
B.4. Stability for Nonlinear Differential Equations 1170
B.5. Separable and Exact Differential Equations 1171
B.6. Existence and Uniqueness of Solutions 1173
B.7. Continuity of Solutions 1174
B.8. Difference Equations 1175
B.9. Exercises 1177
Chapter C. Brief Review of Dynamic Games 1179
C.1. Basic Definitions 1179
C.2. Some Basic Results 1183
C.3. Application: Repeated Games With Perfect Observability 1187
C.4. Exercises 1189
Chapter D. List of Theorems 1191
Chapter 2 1191
Chapter 5 1191
Chapter 6 1191
Chapter 7 1192
Chapter 10 1192
Chapter 16 1193
Chapter 22 1193
Appendix Chapter A 1193
Appendix Chapter B 1194
Appendix Chapter C 1195
References (incomplete) 1197
ix
Preface
This book is intended to serve two purposes:
(1) First and foremost, this is a book about economic growth and long-run economic
development. The process of economic growth and the sources of differences in
economic performance across nations are some of the most interesting, important
and challenging areas in modern social science. The primary purpose of this book is
to introduce graduate students to these major questions and to the theoretical tools
necessary for studying them. The book therefore strives to provide students with a
strong background in dynamic economic analysis, since only such a background will
enable a serious study of economic growth and economic development. It also tries
to provide a clear discussion of the broad empirical patterns and historical processes
underlying the current state of the world economy. This is motivated by my belief
thattounderstandwhysomecountriesgrowandsomefailtodoso, economistshave
to move beyond the mechanics of models and pose questions about the fundamental
causes of economic growth.
(2) In a somewhat different capacity, this book is also a graduate-level introduction
to modern macroeconomics and dynamic economic analysis. It is sometimes com-
mented that, unlike basic microeconomic theory, there is no core of current macro-
economic theory that is shared by all economists. This is not entirely true. While
there is disagreement among macroeconomists about how to approach short-run
macroeconomic phenomena and what the boundaries of macroeconomics should be,
there is broad agreement about the workhorse models of dynamic macroeconomic
analysis. These include the Solow growth model, the neoclassical growth model, the
overlapping-generations model and models of technological change and technology
adoption. Since these are all models of economic growth, a thorough treatment of
modern economic growth can also provide (and perhaps should provide) an intro-
ductiontothiscorematerialofmodernmacroeconomics. Althoughthereareseveral
good graduate-level macroeconomic textbooks, they typically spend relatively little
timeonthebasiccorematerialanddonotdevelopthelinksbetweenmodernmacro-
economic analysis and economic dynamics on the one hand and general equilibrium
theory on the other. In contrast, the current book does not cover any of the short-
run topics in macroeconomics, but provides a thorough and rigorous introduction
to what I view to be the core of macroeconomics. Therefore, the second purpose of
the book is to provide a first graduate-level course in modern macroeconomics.
The selection of topics is designed to strike a balance between the two purposes of the
book. Chapters 1, 3 and 4 introduce many of the salient features of the process of economic
growth and the sources of cross-country differences in economic performance. Even though
these chapters cannot do justice to the large literature on economic growth empirics, they
provide a sufficient background for students to appreciate the set of issues that are central to
the study of economic growth and also a platform for a further study of this large literature.
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