Economic growth and economic development 139

Introduction to Modern Economic Growth 3.4 Solow Model and Cross-Country Income Differences: Regression Analyses 3.4.1 A World of Augmented Solow Economies An important paper by Mankiw, Romer and Weil (1992) used regression analysis to take the augmented Solow model, with human capital, to data In line with our main emphasis here, let us focus on the cross-country part of Mankiw, Romer and Weil’s (1992) analysis To this, we will use the Cobb-Douglas model in Example 3.2 and envisage a world consisting of j = 1, , N countries Mankiw, Romer and Weil (1992), like many other authors, start with the assumption mentioned above, that “each country is an island”; in other words, they assume that countries not interact (perhaps except for sharing some common technology growth, see below) This assumption enables us to analyze the behavior of each economy as a self-standing Solow model Even though “each country is an island” is an unattractive assumption, it is a useful starting point both because of its simplicity and because this is where much of the literature started from (and in fact, it is still where much of the literature stands) Following Example 3.2, we assume that country j = 1, , N has the aggregate production function: Yj (t) = Kjβ (t) Hjα (t) (Aj (t) Lj (t))1−α−β This production function nests the basic Solow model without human capital when α = First, assume that countries differ in terms of their saving rates, sk,j and sh,j , population growth rates, nj , and technology growth rates A˙ j (t) /Aj (t) = gj As usual, define kj ≡ Kj /Aj Lj and hj ≡ Hj /Aj Lj Since our main interest here is cross-country income differences, rather than studying the dynamics of a particular country over time, let us focus on a world in which each country is in their steady state (thus ignoring convergence dynamics, which was the focus in the previous section) To the extent that countries are not too far from their steady state, there will be little loss of insight from this assumption, though naturally this approach will not be satisfactory when we think of countries experiencing very large growth spurts or growth collapses, as some of the examples discussed in Chapter 125