Glossary of Key Terms
Glossary of Key Terms
| Term | Definition |
| AK Model | A model of endogenous growth that assumes the aggregate production function is linear in the stock of a broad measure of capital (Y=AK). It posits no diminishing returns, allowing saving and investment policies to permanently affect the long-run growth rate. |
| Appropriate Institutions | The idea, attributed to Gerschenkron, that the institutions or policies most conducive to growth depend on a country’s stage of technological development. Institutions favoring imitation may be best for countries far from the frontier, while those favoring innovation are better for countries near the frontier. |
| Cass-Koopmans-Ramsey Model | An extension of the neoclassical growth model in which the saving rate is not fixed but is derived from the intertemporal utility maximization of a representative household. |
| Club Convergence | The phenomenon whereby some countries converge toward the growth rates of the most advanced economies, while other countries diverge or stagnate. It suggests the existence of multiple steady states or convergence groups. |
| Conditional Convergence | The prediction that a country grows faster the farther it is below its own steady-state level of income. It implies that two countries will converge to each other only if they share the same fundamental determinants of their steady state (e.g., saving rates, technology). |
| Creative Destruction | The process, central to Schumpeterian growth theory, by which new, quality-improving innovations render old products, processes, or firms obsolete. This turnover is a key driver of long-term productivity growth. |
| Directed Technical Change | The idea that the direction of innovation is endogenous and responds to economic incentives, particularly the “market-size effect.” Technical change will be directed toward developing technologies that serve larger or more profitable markets. |
| Euler Equation | A necessary condition for optimal consumption smoothing over time, stating that the marginal rate of substitution between consumption in different periods must equal the marginal rate of transformation (1 + interest rate). |
| Exogenous Technological Change | Technological progress that is assumed to be independent of economic forces and determined outside the model, typically growing at a constant exponential rate. It is the sole source of long-run per capita growth in the neoclassical model. |
| General-Purpose Technology (GPT) | A major technological innovation characterized by pervasiveness (use in many sectors), scope for improvement, and its ability to spawn secondary innovations (innovation spanning). Examples include the steam engine and information technology. |
| Growth Accounting | A method for decomposing the growth rate of output into components attributable to the growth of factor inputs (like capital and labor) and a residual component attributed to the growth of total factor productivity (TFP). |
| Harrod-Domar Model | An early growth model that, under assumptions of fixed production coefficients and a constant saving rate, implies that the growth rate of output is increasing in the saving rate. It is a precursor to the AK model. |
| Inada Conditions | A set of assumptions on a production function ensuring that the marginal product of capital approaches infinity as the capital stock approaches zero, and approaches zero as the capital stock approaches infinity. These conditions guarantee a unique, stable, positive steady state in the Solow-Swan model. |
| Malthusian Stagnation | A pre-industrial economic state characterized by negligible growth in living standards, where any short-run increase in per capita income leads to population growth, which in turn drives per capita income back down to a subsistence level due to diminishing returns. |
| Neoclassical Growth Model | The benchmark growth model (also known as the Solow-Swan model) that emphasizes capital accumulation with diminishing marginal productivity. It predicts that in the long run, per capita growth is driven solely by exogenous technological progress. |
| Product-Variety Model | An innovation-based endogenous growth model where growth is driven by the creation of new varieties of intermediate products. Increased variety enhances productivity by allowing for a greater division of labor. |
| Proximity to the Frontier | A measure of a country’s or industry’s technological development, typically calculated as its productivity level divided by the productivity level of the world leader (the “frontier”). |
| Research Arbitrage | An equilibrium condition in innovation-based growth models stating that the marginal cost of research must equal the expected marginal benefit (the incremental probability of innovation multiplied by the value of a successful innovation). |
| Scale Effects | The prediction of some first-generation endogenous growth models that a larger economy (e.g., in terms of population or number of researchers) should experience a faster rate of long-run growth. |
| Schumpeterian Model | An innovation-based endogenous growth model where growth is driven by quality-improving innovations that make older products obsolete, a process known as “creative destruction.” |
| Solow Residual | The empirical measure of Total Factor Productivity (TFP) growth. It is calculated as the residual growth in output that cannot be explained by the growth in measured inputs like capital and labor. |
| Total Factor Productivity (TFP) | A measure of the overall productivity with which an economy uses all its factors of production. TFP growth captures the effect of technological progress and other efficiency improvements on output growth. |
| Transversality Condition | A condition in dynamic optimization problems with an infinite horizon that ensures the present value of capital (or assets) goes to zero in the limit. It effectively rules out paths where the agent accumulates capital indefinitely without consuming it. |