Chapter 2 Notes
Chapter 2: Aid for investment
-What is the financing gap?
Gap between required investment and domestic saving
-Explain the Harold-Domar approach and its failings?
GDP growth will be proportional to the share of investment spending in GDP. Its failings are that this model applied more to the short-run business cycle in rich countries. Also, he was writing in the aftermath of the Great Depression, thus taking high unemployment as given.
-True or False. There is no relationship between aid and investment _T_
-What incentives does the financing gap approach provide to recipients? Hint: p.44
The financing gap is larger, and aid is larger, the lower the savings of recipient. It creates incentives against recipient’s saving his own resources for development. Aid will not lead to increased investment; but to higher consumption. Aid can promote investment if it requires matching increases in the country’s savings rate, public and private.
-How can aid rightfully promote investment? Under what conditions? Hint: p.38
Aid should have been made conditional on matching increases in a country’s savings rate. That would have given the governments in poor countries incentives to increase their own savings and to promote private savings, through a combination of tax breaks for income devoted to savings and taxes on consumption.
Chapter 3: Solow’s surprise
-What is capital fundamentalism? Hint: p. 47-48
Capital fundamentalism is the belief that increasing buildings and machinery is the fundamental determinant of growth.
-Explain the role of diminishing returns and labor productivity in the context of the Solow model. Hint: p.48-49. Increasing machines per worker will soon lead to diminishing marginal returns, a consequence of the low share of physical capital in output. The only way we can have a higher standard of living is if we increase production per worker, or labor productivity.
-How does technology/technical change make sustained growth possible? Hint: p.
-What is the financing gap?
Gap between required investment and domestic saving
-Explain the Harold-Domar approach and its failings?
GDP growth will be proportional to the share of investment spending in GDP. Its failings are that this model applied more to the short-run business cycle in rich countries. Also, he was writing in the aftermath of the Great Depression, thus taking high unemployment as given.
-True or False. There is no relationship between aid and investment _T_
-What incentives does the financing gap approach provide to recipients? Hint: p.44
The financing gap is larger, and aid is larger, the lower the savings of recipient. It creates incentives against recipient’s saving his own resources for development. Aid will not lead to increased investment; but to higher consumption. Aid can promote investment if it requires matching increases in the country’s savings rate, public and private.
-How can aid rightfully promote investment? Under what conditions? Hint: p.38
Aid should have been made conditional on matching increases in a country’s savings rate. That would have given the governments in poor countries incentives to increase their own savings and to promote private savings, through a combination of tax breaks for income devoted to savings and taxes on consumption.
Chapter 3: Solow’s surprise
-What is capital fundamentalism? Hint: p. 47-48
Capital fundamentalism is the belief that increasing buildings and machinery is the fundamental determinant of growth.
-Explain the role of diminishing returns and labor productivity in the context of the Solow model. Hint: p.48-49. Increasing machines per worker will soon lead to diminishing marginal returns, a consequence of the low share of physical capital in output. The only way we can have a higher standard of living is if we increase production per worker, or labor productivity.
-How does technology/technical change make sustained growth possible? Hint: p.