Introduction to Modern Economic Growth

Introduction to Modern Economic Growth is a groundbreaking text from one of today's leading economists. Daron Acemoglu gives graduate students not only the tools to analyze growth and related macroeconomic problems, but also the broad perspective needed to apply those tools to the big-picture questions of growth and divergence. And he introduces the economic and mathematical foundations of modern growth theory and macroeconomics in a rigorous but easy to follow manner. After covering the necessary background on dynamic general equilibrium and dynamic optimization, the book presents the basic workhorse models of growth and takes students to the frontier areas of growth theory, including models of human capital, endogenous technological change, technology transfer, international trade, economic development, and political economy. The book integrates these theories with data and shows how theoretical approaches can lead to better perspectives on the fundamental causes of economic growth and the wealth of nations. Innovative and authoritative, this book is likely to shape how economic growth is taught and learned for years to come.

Preface xv Part I: Introduction
Chapter 1: Economic Growth and Economic Development: The Questions 31.1 Cross-Country Income Differences 31.2 Income and Welfare 71.3 Economic Growth and Income Differences 91.4 Origins of Today's Income Differences and World Economic Growth 111.5 Conditional Convergence 151.6 Correlates of Economic Growth 181.7 From Correlates to Fundamental Causes 191.8 The Agenda 211.9 References and Literature 23
Chapter 2: The Solow Growth Model 262.1 The Economic Environment of the Basic Solow Model 272.2 The Solow Model in Discrete Time 342.3 Transitional Dynamics in the Discrete-Time Solow Model 432.4 The Solow Model in Continuous Time 472.5 Transitional Dynamics in the Continuous-Time Solow Model 512.6 A First Look at Sustained Growth 552.7 Solow Model with Technological Progress 562.8 Comparative Dynamics 672.9 Taking Stock 682.10 References and Literature 692.11 Exercises 71
Chapter 3: The SolowModel and the Data 773.1 Growth Accounting 773.2 The Solow Model and Regression Analyses 803.3 The Solow Model with Human Capital 853.4 Solow Model and Cross-Country Income Differences: Regression Analyses 903.5 Calibrating Productivity Differences 963.6 Estimating Productivity Differences 1003.7 Taking Stock 1053.8 References and Literature 1063.9 Exercises 107
Chapter 4: Fundamental Determinants of Differences in Economic Performance 1094.1 Proximate versus Fundamental Causes 1094.2 Economies of Scale, Population, Technology, and World Growth 1124.3 The Four Fundamental Causes 1144.4 The Effect of Institutions on Economic Growth 1234.5 What Types of Institutions? 1364.6 Disease and Development 1374.7 Political Economy of Institutions: First Thoughts 1404.8 Taking Stock 1404.9 References and Literature 1414.10 Exercises 143
Part II: Toward Neoclassical Growth
Chapter 5: Foundations of Neoclassical Growth 1475.1 Preliminaries 1475.2 The Representative Household 1495.3 Infinite Planning Horizon 1565.4 The Representative Firm 1585.5 Problem Formulation 1605.6 Welfare Theorems 1615.7 Proof of the Second Welfare Theorem (Theorem 5.7) * 1685.8 Sequential Trading 1715.9 Optimal Growth 1745.10 Taking Stock 1765.11 References and Literature 1765.12 Exercises 178
Chapter 6: Infinite-Horizon Optimization and Dynamic Programming 1826.1 Discrete-Time Infinite-Horizon Optimization 1826.2 Stationary Dynamic Programming 1856.3 Stationary Dynamic Programming Theorems 1876.4 The Contraction Mapping Theorem and Applications * 1906.5 Proofs of the Main Dynamic Programming Theorems * 1946.6 Applications of Stationary Dynamic Programming 2016.7 Nonstationary Infinite-Horizon Optimization 2116.8 Optimal Growth in Discrete Time 2156.9 Competitive Equilibrium Growth 2196.10 Computation 2216.11 Taking Stock 2216.12 References and Literature 2226.13 Exercises 223
Chapter 7: An Introduction to the Theory of Optimal Control 2277.1 Variational Arguments 2287.2 The Maximum Principle: A First Look 2357.3 Infinite-Horizon Optimal Control 2407.4 More on Transversality Conditions 2507.5 Discounted Infinite-Horizon Optimal Control 2537.6 Existence of Solutions, Concavity, and Differentiability * 2597.7 A First Look at Optimal Growth in Continuous Time 2687.8 The q-Theory of Investment and Saddle-Path Stability 2697.9 Taking Stock 2747.10 References and Literature 2757.11 Exercises 278
Part III: Neoclassical Growth
Chapter 8: The Neoclassical Growth Model 2878.1 Preferences, Technology, and Demographics 2878.2 Characterization of Equilibrium 2938.3 Optimal Growth 2988.4 Steady-State Equilibrium 3008.5 Transitional Dynamics and Uniqueness of Equilibrium 3028.6 Neoclassical Growth in Discrete Time 3058.7 Technological Change and the Canonical Neoclassical Model 3068.8 The Role of Policy 3128.9 Comparative Dynamics 3138.10 A Quantitative Evaluation 3158.11 Extensions 3178.12 Taking Stock 3178.13 References and Literature 3188.14 Exercises 319
Chapter 9: Growth with Overlapping Generations 3279.1 Problems of Infinity 3289.2 The Baseline Overlapping Generations Model 3299.3 The Canonical Overlapping Generations Model 3359.4 Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 3369.5 Role of Social Security in Capital Accumulation 3399.6 Overlapping Generations with Impure Altruism 3429.7 Overlapping Generations with Perpetual Youth 3459.8 Overlapping Generations in Continuous Time 3489.9 Taking Stock 3539.10 References and Literature 3549.11 Exercises 355
Chapter 10: Human Capital and Economic Growth 35910.1 A Simple Separation Theorem 35910.2 Schooling Investments and Returns to Education 36110.3 The Ben-Porath Model 36310.4 Neoclassical Growth with Physical and Human Capital 36710.5 Capital-Skill Complementarity in an Overlapping Generations Model 37110.6 Physical and Human Capital with Imperfect Labor Markets 37410.7 Human Capital Externalities 37910.8 The Nelson-Phelps Model of Human Capital 38010.9 Taking Stock 38210.10 References and Literature 38410.11 Exercises 384
Chapter 11: First-Generation Models of Endogenous Growth 38711.1 The AK Model Revisited 38811.2 The AK Model with Physical and Human Capital 39311.3 The Two-Sector AK Model 39511.4 Growth with Externalities 39811.5 Taking Stock 40211.6 References and Literature 40411.7 Exercises 404
Part IV: Endogenous Technological Change
Chapter 12: Modeling Technological Change 41112.1 Different Conceptions of Technology 41112.2 Science and Profits 41412.3 The Value of Innovation in Partial Equilibrium 41612.4 The Dixit-Stiglitz Model and Aggregate Demand Externalities 42212.5 Individual R&D Uncertainty and the Stock Market 42812.6 Taking Stock 42912.7 References and Literature 43012.8 Exercises 431
Chapter 13: Expanding VarietyModels 43313.1 The Lab-Equipment Model of Growth with Input Varieties 43313.2 Growth with Knowledge Spillovers 44413.3 Growth without Scale Effects 44613.4 Growth with Expanding Product Varieties 44813.5 Taking Stock 45213.6 References and Literature 45313.7 Exercises 453
Chapter 14: Models of Schumpeterian Growth 45814.1 A Baseline Model of Schumpeterian Growth 45914.2 A One-Sector Schumpeterian Growth Model 46814.3 Innovation by Incumbents and Entrants 47214.4 Step-by-Step Innovations * 47914.5 Taking Stock 48914.6 References and Literature 49014.7 Exercises 491
Chapter 15: Directed Technological Change 49715.1 Importance of Biased Technological Change 49815.2 Basics and Definitions 50015.3 Baseline Model of Directed Technological Change 50315.4 Directed Technological Change with Knowledge Spillovers 51415.5 Directed Technological Change without Scale Effects 51815.6 Endogenous Labor-Augmenting Technological Change 51915.7 Generalizations and Other Applications 52215.8 An Alternative Approach to Labor-Augmenting Technological Change* 52315.9 Taking Stock 52615.10 References and Literature 52715.11 Exercises 529
Part V: Stochastic Growth
Chapter 16: Stochastic Dynamic Programming 53716.1 Dynamic Programming with Expectations 53716.2 Proofs of the Stochastic Dynamic Programming Theorems * 54416.3 Stochastic Euler Equations 54916.4 Generalization to Markov Processes * 55216.5 Applications of Stochastic Dynamic Programming 55416.6 Taking Stock 56116.7 References and Literature 56116.8 Exercises 562
Chapter 17: Stochastic Growth Models 56617.1 The Brock-Mirman Model 56717.2 Equilibrium Growth under Uncertainty 57117.3 Application: Real Business Cycle Models 57917.4 Growth with Incomplete Markets: The Bewley Model 58317.5 The Overlapping Generations Model with Uncertainty 58617.6 Risk, Diversification, and Growth 58817.7 Taking Stock 60317.8 References and Literature 60417.9 Exercises 605
Part VI: Technology Diffusion, Trade, and Interdependences
Chapter 18: Diffusion of Technology 61118.1 Productivity Differences and Technology 61118.2 A Benchmark Model of Technology Diffusion 61318.3 Technology Diffusion and Endogenous Growth 61918.4 Appropriate and Inappropriate Technologies and Productivity Differences 62318.5 Contracting Institutions and Technology Adoption 63018.6 Taking Stock 64218.7 References and Literature 64318.8 Exercises 644
Chapter 19: Trade and Growth 64819.1 Growth and Financial Capital Flows 64819.2 Why Does Capital Not Flow from Rich to Poor Countries? 65319.3 Economic Growth in a Heckscher-Ohlin World 65519.4 Trade, Specialization, and the World Income Distribution 66319.5 Trade, Technology Diffusion, and the Product Cycle 67419.6 Trade and Endogenous Technological Change 67819.7 Learning-by-Doing, Trade, and Growth 68019.8 Taking Stock 68419.9 References and Literature 68519.10 Exercises 687
Part VII: Economic Development and Economic Growth
Chapter 20: Structural Change and Economic Growth 69720.1 Nonbalanced Growth: The Demand Side 69720.2 Nonbalanced Growth: The Supply Side 70320.3 Agricultural Productivity and Industrialization 71520.4 Taking Stock 71920.5 References and Literature 72020.6 Exercises 721
Chapter 21: Structural Transformations and Market Failures in Development 72521.1 Financial Development 72621.2 Fertility, Mortality, and the Demographic Transition 72921.3 Migration, Urbanization, and the Dual Economy 73621.4 Distance to the Frontier and Changes in the Organization of Production 74421.5 Multiple Equilibria from Aggregate Demand Externalities and the Big Push 75221.6 Inequality, Credit Market Imperfections, and Human Capital 75821.7 Toward a Unified Theory of Development and Growth? 76421.8 Taking Stock 76821.9 References and Literature 76921.10 Exercises 771
Part VIII: The Political Economy of Growth
Chapter 22: Institutions, Political Economy, and Growth 78122.1 The Impact of Institutions on Long-Run Development 78122.2 Distributional Conflict and Economic Growth in a Simple Society 78422.3 The Canonical Cobb-Douglas Model of Distributional Conflict 79222.4 Distributional Conflict and Competition 79322.5 Subgame Perfect versus Markov Perfect Equilibria 79922.6 Inefficient Economic Institutions: A First Pass 80222.7 Heterogeneous Preferences, Social Choice, and the Median Voter * 80522.8 Distributional Conflict and Economic Growth: Heterogeneity and the Median Voter 81422.9 The Provision of Public Goods: Weak versus Strong States 81722.10 Taking Stock 82222.11 References and Literature 82322.12 Exercises 825
Chapter 23: Political Institutions and Economic Growth 83123.1 Political Regimes and Economic Growth 83223.2 Political Institutions and Growth-Enhancing Policies 83423.3 Dynamic Trade-offs 83723.4 Understanding Endogenous Political Change 85023.5 Taking Stock 85623.6 References and Literature 85723.7 Exercises 858Epilogue: Mechanics and Causes of Economic Growth 861What Have We Learned? 861A Possible Perspective on Growth and Stagnation over the Past 200 Years 864Many Remaining Questions 872
Part IX: Mathematical Appendixes
Appendix A: Odds and Ends in Real Analysis and Applications to Optimization 877A.1 Distances and Metric Spaces 878A.2 Mappings, Functions, Sequences, Nets, and Continuity 880A.3 A Minimal Amount of Topology: Continuity and Compactness * 885A.4 The Product Topology * 889A.5 Absolute Continuity and Equicontinuity * 891A.6 Correspondences and Berge's Maximum Theorem 894A.7 Convexity, Concavity, Quasi-Concavity, and Fixed Points 898A.8 Differentiation, Taylor Series, and the Mean Value Theorem 900A.9 Functions of Several Variables and the Inverse and Implicit Function Theorems 904A.10 Separation Theorems * 907A.11 Constrained Optimization 910A.12 Exercises 915
Appendix B: Review of Ordinary Differential Equations 917B.1 Eigenvalues and Eigenvectors 917B.2 Some Basic Results on Integrals 918B.3 Linear Differential Equations 920B.4 Solutions to Linear First-Order Differential Equations 921B.5 Systems of Linear Differential Equations 924B.6 Local Analysis and Stability of Nonlinear Differential Equations 926B.7 Separable and Exact Differential Equations 927B.8 Existence and Uniqueness of Solutions 929B.9 Continuity and Differentiability of Solutions 930B.10 Difference Equations 930B.11 Exercises 932
Appendix C: Brief Review of Dynamic Games 934C.1 Basic Definitions 934C.2 Some Basic Results 937C.3 Application: Repeated Games with Perfect Observability 941C.4 Exercises 942
Appendix D: List of Theorems 944Chapter 2 944Chapter 5 944Chapter 6 944Chapter 7 945Chapter 10 945Chapter 16 945Chapter 22 946Appendix A 946Appendix B 947Appendix C 947
References 949Name Index 971Subject Index 977