Growth Theory

Lecture handout: Growth theory*

Here is an introduction to the Solow model (more videos in the series are here)

Growth is like an iPhone:

See my Country competitiveness Dashboard.

Consider this photo of Nik Wallenda, cycling across a tightrope:

  • The Solow model shows how he remains balanced (investment and depreciation delivers k*)
  • But any forward movement is exogenous (i.e. technology, population changes)
  • Endogenous growth theory adds some rocket boosters!

In the lecture I showed the dramatic transformation of Hong Kong harbour, as an example of fast economic growth.

In 1945 Hong Kong was a poor territory. After war and Japanese occupation many of its 600,000 people were starving. They had no traditionally considered natural resources, and yet soon became a major manufacturing location, the busiest port in the world, and a centre of the global financial market.

According to reasonable internet sources, Hong Kong’s GDP per capita is now bigger than the UK’s.

What happened? In 1945 civil servant John Cowperthwaite made Hong Kong a free port, which meant no tariffs for most goods, no export subsidies, and few restrictions on imports. Trade grew quickly.

On the supply side, it is not as though Hong Kong’s services lack in any way. The territory has the fourth best education system in the world, according to Pearson, and it ranks top of Bloomberg’s healthcare index. Its public transport system was ranked the world’s best last year, and it is consistently used as a model elsewhere (Frisby, 2019, p.13)

Perhaps even more powerfully, Hong Kong has been used as a model for other areas on mainland China. In 1980 Shenzhen became a “special economic zone” with low taxes and market-friendly regulation. The population rose from 30,000 to 13 million. Here’s Hong Kong in 12 amazing photos.

In 2014 I attended a Mont Pelerin Society meeting in Hong Kong. Here I am in front of that amazing skyline, with my undergraduate econ study partner!

For more see Frisby 2019, Chapter 2.







Some other nice examples of side by side growth include this view of London from Greenwich, 40 years apart:

Here is Phnom Penh, 9 years apart:

This page ties into Chapter 12 of Economics: A Complete Guide for Business

Learning Objectives: Understand the foundations of economic growth. See how economic growth theories inform development economics. 

Cutting edge theory: This session defines cutting edge growth 

Focus on diversity: One of the most widely respected economic historians of the factors that led to industrialisation is Deidre McCloskey

Spotlight on sustainability: This session defines the sustainable growth rate as the balanced path between capital accumulation and capital consumption.

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