Glossary of Key Terms
Glossary of Key Terms
| Term | Definition |
| AK Model | A type of endogenous growth model where output is a linear function of capital (Y=AK), thus avoiding diminishing returns to capital and allowing capital accumulation to be the engine of sustained growth. |
| Arrow Securities | Financial instruments used to transfer resources across different dates and states of nature, ensuring that sequential trading in complete markets is equivalent to trading at a single point in time (Arrow-Debreu equilibrium). |
| Balanced Growth Path (BGP) | An equilibrium path where key economic variables (like output per capita and consumption per capita) grow at a constant rate. In models with technological progress, this corresponds to a steady state in transformed variables. |
| Conditional Convergence | The phenomenon where the income gap between countries that share similar characteristics (e.g., saving rates, institutions) tends to shrink over time. |
| Creative Destruction | A process, central to Schumpeterian growth models, where new firms with innovative technologies or products enter the market, displacing and destroying the economic rents of incumbent firms. |
| Directed Technological Change | A framework where the direction and bias of technological change (e.g., whether it is labor-augmenting or capital-augmenting) are endogenously determined by economic incentives, such as relative factor prices and market sizes. |
| Dynamic Inefficiency | A state in an overlapping generations model where the steady-state interest rate is less than the population growth rate, indicating overaccumulation of capital. In this state, a Pareto improvement is possible by reducing savings. |
| Euler Equation (Consumption) | A first-order condition from an intertemporal optimization problem that characterizes the optimal path of consumption over time, typically relating the marginal utility of consumption today to the discounted marginal utility of consumption tomorrow. |
| First Welfare Theorem | A theorem stating that, under specific conditions (such as complete markets and local non-satiation of consumers), any competitive equilibrium allocation is Pareto optimal. |
| Fundamental Causes of Economic Growth | The underlying reasons for differences in proximate causes across countries. These are often categorized into four main hypotheses: luck, geography, institutions, and culture. |
| Golden Rule Saving Rate | In the Solow model, the saving rate that maximizes the level of consumption per capita in the steady state. |
| Growth Accounting | An empirical framework used to decompose the growth rate of output into contributions from the growth of inputs (capital and labor) and a residual term representing technological progress (TFP). |
| Hamiltonian | A function used in optimal control theory to find the necessary conditions for a dynamic optimization problem. It combines the instantaneous objective function and the constraints using costate variables (multipliers). |
| Harrod-Neutral Technological Progress | A form of technological progress that is purely labor-augmenting, meaning an increase in technology raises output as if the economy had more labor. This is a necessary condition for a balanced growth path. |
| Human Capital | The stock of skills, education, competencies, and other productivity-enhancing characteristics embodied in the labor force. |
| Inada Conditions | A set of boundary conditions often imposed on production functions, stating that the marginal product of an input approaches infinity as the input goes to zero and approaches zero as the input goes to infinity. |
| Institutions Hypothesis | A theory arguing that differences in economic institutions—which shape the incentives for investment, innovation, and resource allocation—are the fundamental cause of differences in economic growth and prosperity across societies. |
| Market Size Effect | An incentive in models of directed technological change to develop technologies that serve a larger market, often favoring factors of production that are more abundant. |
| Neoclassical Growth Model (Ramsey Model) | A dynamic general equilibrium model of economic growth where the saving rate is endogenously derived from the optimization problem of an infinitely-lived representative household. |
| No-Ponzi-Game Condition | A constraint imposed on households in infinite-horizon models to prevent them from endlessly rolling over debt, ensuring that the present value of their asymptotic assets is non-negative. |
| Overlapping Generations (OLG) Model | A dynamic model in which individuals have finite lives and coexist with younger and older generations. This structure deviates from the representative household assumption and can lead to outcomes like dynamic inefficiency. |
| Pareto Optimality | An allocation of resources where it is impossible to make any one individual better off without making at least one individual worse off. |
| Perpetual Youth Model | A type of overlapping generations model where individuals face a constant probability of death at each period, regardless of their age, simplifying aggregation and dynamic analysis. |
| Price Effect | An incentive in models of directed technological change to develop technologies that complement scarce factors, as the goods produced with these factors command higher relative prices. |
| Proximate Causes of Economic Growth | Factors such as physical capital, human capital, and technology that are directly associated with economic growth and income levels. |
| q-Theory of Investment | A model of firm investment under adjustment costs, where a firm’s investment decisions are guided by “Tobin’s q,” the ratio of the market value of an additional unit of capital to its replacement cost. |
| Representative Household | A modeling assumption that the aggregate behavior of all households in an economy can be represented as if it were the outcome of a single, utility-maximizing agent. |
| Reversal of Fortune | The historical phenomenon where former European colonies that were relatively prosperous and densely populated in 1500 are now among the poorer nations, and vice versa. This is often cited as evidence for the institutions hypothesis. |
| Scale Effect | A feature of some endogenous growth models where the size of the population (or market) positively affects the long-run growth rate of the economy. |
| Solow Growth Model | A foundational growth model that explains long-run economic growth through capital accumulation, population growth, and exogenous technological progress, using a constant, exogenous saving rate. |
| Total Factor Productivity (TFP) | A measure of the efficiency with which inputs are used in production. In growth accounting, it is the portion of output growth not explained by the growth in inputs, often interpreted as the contribution of technological progress. |
| Transversality Condition | A boundary condition in infinite-horizon optimization problems that ensures the value of the objective function is finite and rules out paths where assets accumulate indefinitely without being consumed. |