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EC207 Midterm: Key Terms

Course Code
Shadab Qaiser
Study Guide

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Public-Choice Theory (New Political Economy Approach)
Governments can do nothing right
Politicians act in self interest using their power and authority
Minimal government is the best government
Government only leads to misallocation of resources
Market-Friendly Approach (Most Recent 99’s)
Recognition of market imperfections in developing countries
Government intervention should be market friendly
Government intervention to create investment in social and physical
infrastructure and environment outcomes
Traditional Neoclassical Growth Theory: Solow Model
Addition of labour and technology
Countries with higher savings/investment grow faster in the short run and
tend to converge to higher per capita income levels
Openness (bringing trade and investment)
Includes upgrades in technology and higher investment rates temporarily
increasing the rate of output growth and income per capital.
Classical Growth Theory
The view that the growth of real GDP per person is temporary and that when
it rises above the subsistence level, a population explosion eventually brings
real GDP per person back to the subsistence level
Advances in technology lead to investment in new capital.
Labour productivity increases and the real wage real rises above the
subsistence level. When the real wage rate is above the subsistence level, the
population grows.
Neoclassical Growth Theory
The proposition that real GDP per person grows because technological
change induces a level of saving and investment that makes capital per hour
of labour grow.
Growth ends only if technological change stops
It predicts that countries with higher rates of saving and investment will
have higher levels of capital and income per worker in the long run.
The neoclassical view is that population growth is independent of real GDP
and the real GDP growth rate
In this theory, the rate of technology change influences the economic growth
rate but economic growth rate does not influence the pace of technological
New Growth Theory
Holds that real GDP per person grows because of choices that people make in
the pursuit of profit and that growth can persist indefinitely.
Growth accounting tells us that to achieve faster economic growth we must
either increase the growth rate of capital per hour of labour or increase the
pace of technological change.
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