Download UCSB ECON 114A Economic Development: Part 7 Class Notes and more Lecture notes Economic policy in PDF only on Docsity! Economic Development University of California, Santa Barbara ECON 114 Class and Book Notes Part 7 Macrointertia Huge explosion of population growth โ Slow moving, aggregate problem โ Age structure is causing them โ Young population will increase population even if fertility and birth rates are falling Microinertia 1. Missing Markets - Why are there declining death rates? a. Children are social security for parents b. No investment markets, need to be cared for in older age c. Child is investment for retirement d. If missing market is filled, birth rate will decline 2. Investment could die 3. Investment could be a poor earner 4. Mortality and Fertility (1 - p) ^ n >= (1 - q) N = number of children Q = parentsโ acceptable probability of care โ Q = 0 (no care), q = 1 (full care) โ Risk idea P = probability the child cares for elder โ P = 0 (no care), p = 1 (full care) n >= (log(1 - q)) / (log(1 - p)) โ Determines how many children you will have โ qโ or pโ, number of children will increase Hoarding: Uncertainty of whether child will earn enough to support parents, they end up stockpiling children Targeting: Infant mortality rates are uncertain, they will target to have a certain amount of children โ May overproduce if children donโt die Micro Inertia Stage II Explanation 1. Missing Markets a. Children are an investment as a source of utility 2. Mortality and Fertility (1 - p) ^ n >= (1 - q) โ n >= (log(1 - q)) / (log(1 - p)) ฮ = 4 g = s / 4 1,000 workers 1,000 children (do not contribute to the economy) โ Age does not matter GDP = $5,000 GDP per capita = 5,000 / 2,000 S = 28% g = 28 / 4 = 7% Now, let population increase by 4% g = s / ฮ - n 1st year, population increases 80 extra people (2,000 x 4%) โ Children are not reproducing In 10 years, children will be (children donโt become adults): 1,000 + 960 = 1,960 Per capita GDP decreases and growth rate too Savings will not stay the same โ Children need to consume โ Continues to fall with more children Assumed s and n were exogenous for HD equation โ But we see that if n increases, s decreases โ Problem as economist, need to predict change and scale of change (how much is it falling by) When nฮ, we see sฮ too nโ โ gโ sโ โ gโ โ Two variables cause less growth โ Endogeneity problem: Results from the unstable model are inaccurate Next, show endogeneity between ฮ and n โ Capital and labor are complements Instability Property: Model only holds with balanced / full capital and labor โ Ratio of ฮ and g must be constant โ If n grows, implies labor growth is the same 3% = n = g which is a coincidence โ Every person let in gets perfect amount of capital and still room for growth โ UNLIKELY If n > g, means rising unemployment โ Model does not allow unemployment Labor becomes a drag on capital โ Wage has no effect on model โ Originally at equilibrium and population increases โ New population works on machines, no unemployment Example: 5 machines with 7 workers Chinaโs capital became more efficient โ More output per machine โ Lots of people invested in capital to increase output โ Aided by policies that reduced population If unemployment not rising (n > g), moving rapidly up and down with business cycle, then we know thereโs a drag on the capital, and as a result output, since every person is employed on not enough capital โ DIRECT RELATIONSHIP between ฮ and n โ Decreased GDP but no rising unemployment Endogeneity of all the variables makes a bad model If nโ ฮโ, then gโ โ Sโ, cannot tell the change on growth What about g > n? โ Can have idle machines as well as idle people g = s / ฮ - n - ๐
ฮn โ ฮs
