Preface

This book is intended to serve two purposes:

(1) First and foremost, this is a book about economic growth and long-run economic development. The process of economic growth and the sources of differences in economic performance across nations are some of the most interesting, important and challenging areas in modern social science.

(2) In a somewhat different capacity, this book is also a graduate-level introduction to modern macroeconomics and dynamic economic analysis. It is sometimes com­mented that, unlike basic microeconomic theory, there is no core of current macro­economic theory that is shared by all economists. This is not entirely true. While there is disagreement among macroeconomists about how to approach short-run macroeconomic phenomena and what the boundaries of macroeconomics should be, there is broad agreement about the workhorse models of dynamic macroeconomic analysis. These include the Solow growth model, the neoclassical growth model, the overlapping-generations model and models of technological change and technology adoption. Since these are all models of economic growth, a thorough treatment of modern economic growth can also provide (and perhaps should provide) an intro­duction to this core material of modern macroeconomics.

The selection of topics is designed to strike a balance between the two purposes of the book. Chapters 1, 3 and 4 introduce many of the salient features of the process of economic growth and the sources of cross-country differences in economic performance. Even though these chapters cannot do justice to the large literature on economic growth empirics, they provide a sufficient background for students to appreciate the set of issues that are central to the study of economic growth and also a platform for a further study of this large literature.

Chapters 5-7 provide the conceptual and mathematical foundations of modern macroeco­nomic analysis. Chapter 5 provides the microfoundations for much of the rest of the book (and for much of modern macroeconomics), while Chapters 6 and 7 provide a quick but rel­atively rigorous introduction to dynamic optimization. Most books on macroeconomics or economic growth use either continuous time or discrete time exclusively. I believe that a se­rious study of both economic growth and modern macroeconomics requires the student (and the researcher) to be able to go between discrete and continuous time and choose whichever one is more convenient or appropriate for the set of questions at hand. Therefore, I have deviated from this standard practice and included both continuous time and discrete time material throughout the book.

Chapters 2, 8, 9 and 10 introduce the basic workhorse models of modern macroeconomics and traditional economic growth, while Chapter 11 presents the first generation models of sus­tained (endogenous) economic growth.

Chapter 16 generalizes the tools introduced in Chapter 6 to stochastic environments. Using these tools, Chapter 17 presents a number of models of stochastic growth, most notably, the neoclassical growth model under uncertainty, which is the foundation of much of modern macroeconomics (though it is often left out of economic growth courses). The canonical Real Business Cycle model is presented as an application. This chapter also covers another major workhorse model of modern macroeconomics, the incomplete markets model of Bewley. Finally, this chapter also presents a number of other approaches to modeling the interaction between incomplete markets and economic growth and shows how models of stochastic growth can be useful in understanding how economies transition from stagnation or slow growth to an equilibrium with sustained growth.

Chapters 18-21 cover a range of topics that are sometimes left out of economic growth textbooks. These include models of technology adoption, technology diffusion, the interaction between international trade and technology, the process of structural change, the demographic transition, the possibility of poverty traps, the effects of inequality on economic growth and the interaction between financial and economic development. These topics are important for creating a bridge between the empirical patterns we observe in practice and the theory. Most traditional growth models consider a single economy in isolation and often after it has already embarked upon a process of steady economic growth. A study of models that incorporate cross-country interdependences, structural change and the possibility of takeoffs will enable us to link core topics of development economics, such as structural change, poverty traps or the demographic transition, to the theory of economic growth.

Finally, Chapters 22 and 23 consider another topic often omitted from macroeconomics and economic growth textbooks; political economy.

A few words on the philosophy and organization of the book might also be useful for students and teachers. The underlying philosophy of the book is that all the results that are stated should be proved or at least explained in detail. This implies a somewhat different organization than existing books. Most textbooks in economics do not provide proofs for many of the results that are stated or invoked, and mathematical tools that are essential for the analysis are often taken for granted or developed in appendices. In contrast, I have strived to provide simple proofs of almost all results stated in this book. It turns out that once unnecessary generality is removed, most results can be stated and proved in a way that is easily accessible to graduate students. In fact, I believe that even somewhat long proofs are much easier to understand than general statements made without proof, which leave the reader wondering about why these statements are true.

I hope that the style I have chosen not only makes the book self-contained, but also gives the students an opportunity to develop a thorough understanding of the material. In addition, I present the basic mathematical tools necessary for analysis within the main body of the text. My own experience suggests that a “linear” progression, where the necessary mathematical tools are introduced when needed, makes it easier for the students to follow and appreciate the material. Consequently, analysis of stability of dynamical systems, dynamic programming in discrete time and optimal control in continuous time are all introduced within the main body of the text.

I have also included a large number of exercises. Students can only gain a thorough understanding of the material by working through the exercises. The exercises that are somewhat more difficult are also marked with a “*”.

This book can be used in a number of different ways. First, it can be used in a one-quarter or one-semester course on economic growth. Such a course might start with Chapters 1-4, then depending on the nature of the course, use Chapters 5-7 either for a thorough study of the general equilibrium and dynamic optimization foundations of growth theory or only for reference. Chapters 8-11 cover the traditional growth theory and Chapters 12-15 provide the basics of endogenous growth theory. Depending on time and interest, any selection of Chapters 16-23 can be used for the last part of such a course.

Second, the book can be used for a one-quarter first-year graduate-level course in macro­economics. In this case, Chapter 1 is optional. Chapters 3, 5-7, 8-11 and 16 and 17 would be the core of such a course. The same material could also be covered in a one-semester course, but in this case, it could be supplemented either with some of the later chapters or with material from one of the leading graduate-level macroeconomic textbooks on short-run macroeconomics, fiscal policy, asset pricing, or other topics in dynamic macroeconomics.

Third, the book can be used for an advanced (second-year) course in economic growth or economic development.

Finally, since the book is self-contained, I also hope that it can be used for self-study.

Acknowledgments. This book grew out of the first graduate-level introduction to macroeconomics course I have taught at MIT. Parts of the book have also been taught as part of a second-year graduate macroeconomics course. I would like to thank the students who have sat through these lectures and made comments that have improved the manuscript. I owe a special thanks to Monica Martinez-Bravo, Samuel Pienknagura, Lucia Tian Tian and especially Michael Peters and Alp Simsek for outstanding research assistance. In fact, without Michael and Alp’s help this book would have taken me much longer and would have contain many more errors. I also thank Lauren Fahey for editorial suggestions and help with the references. I would also like to thank George-Marios Angeletos, Olivier Blanchard, Francesco Caselli, Melissa Dell, Peter Funk, Oded Galor, Hugo Hopenhayn, Simon Johnson, Chad Jones, Ismail Saglam, Jesse Zinn for useful suggestions and corrections on individual chapters, and especially Pol Antras, Kiminori Matsuyama, James Robinson, Jesus Fernandez-Villaverde and Pierre Yared for very valuable suggestions on multiple chapters.

Please note that this is a preliminary draft of the book manuscript. The draft certainly contains mistakes. Comments and suggestions for corrections are welcome.

Version 2.2: October, 2007