Economics Basics — Economic Growth and International Economy

Part 12. The Economics of Economic Growth

Economic Growth Theories

1. Solow Growth Model (Exogenous Growth)

The neoclassical economist Solow assumes labor and capital are input factors of production.

• Diminishing Marginal Returns to Capital: As capital is continuously added, the output generated by each additional unit of capital gradually decreases.
• Steady State: A stationary state where new investment exactly offsets depreciation plus population growth. In this state, the growth rate of per capita national income = 0.
• The Role of Technological Progress: The force that breaks through the limitations of the steady state. Assumed to fall from outside the model (exogenous) → the source of sustained growth.

2. Endogenous Growth Theory (Lucas, Romer)

Why can developed countries widen the gap with developing countries?

• Increasing Returns to Knowledge and Human Capital: R&D and education investments generate external effects, enabling sustained growth.
• The Logic of Government Intervention: Knowledge has the characteristics of a public good → the private sector underinvests (market failure) → justifies state subsidies for education and R&D.

3. Comparison of Trade Development Strategies

Strategy	Content	Advantages	Disadvantages
Export-led	Export-focused growth (Korean model)	Securing economies of scale, fast technology transfer	Excessive external dependence
Import-substitution	Prioritizing domestic market protection and breaking away from foreign influence (Latin America)	Protecting domestic industries	Scale limitations, closed nature

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Part 13. International Economics

Chapters 34–35. International Trade System

1. Theory of Comparative Advantage (Ricardo)

If any country specializes in and trades goods with a relatively low opportunity cost, the wealth of both countries increases (gains from trade).

2. Comparison of Tariffs vs. Import Quotas

Classification	Tariff	Import Quota
Concept	Imposing a tax on imported goods	Setting a legal limit on the import volume itself
Domestic Price	Artificially higher than the international price	Artificially higher than the international price
Recipient of Excess Profit	Domestic government (national treasury)	Holders of import monopoly licenses (generates quota rent)
Policy Transparency	High	Low (risk of corruption and rent-seeking)

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Exchange Rate Structure and Monetary Systems

1. Exchange Rate Fluctuation Direction and Determinants

Rise in exchange rate (KRW/USD) = Depreciation of the Korean Won = Strong Dollar

Macroeconomic Indicator	Impact on Exchange Rate
Current Account Surplus	Foreign currency supply ↑ → Exchange rate ↓
Current Account Deficit	Foreign currency demand ↑ → Exchange rate ↑
Domestic Interest Rate > Foreign Interest Rate	Overseas capital inflow ↑ → Foreign currency supply ↑ → Exchange rate ↓
Domestic Price Rise	Exports ↓, Imports ↑ → Foreign currency demand ↑ → Exchange rate ↑

2. Floating vs. Fixed Exchange Rate Systems: Monetary and Fiscal Policy Effects (Mundell-Fleming)

Based on an open economy with small-scale free capital mobility.

Policy	Floating Exchange Rate System	Fixed Exchange Rate System
Monetary Policy	Maximization of effect (Money ↑ → Interest rate ↓ → Capital outflow → Exchange rate ↑ → Net exports ↑)	Neutralization of effect (Money ↑ → Upward pressure on exchange rate → Central bank sells foreign currency → Money supply returns to original level)
Fiscal Policy	Neutralization of effect (Spending ↑ → Interest rate ↑ → Capital inflow → Exchange rate ↓ → Net exports ↓ → Crowding-out effect)	Maximization of effect (Spending ↑ → Interest rate ↑ → Capital inflow → Increase money supply to defend against falling exchange rate → Amplification of economic expansion)

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The Marshall-Lerner Condition and the J-Curve Effect

• Marshall-Lerner Condition: For a rise in the exchange rate to lead to an increase in net exports, the sum of the price elasticity of exports and the price elasticity of imports must be > 1.
• J-Curve Effect: Immediately after a rise in the exchange rate, net exports actually decrease due to short-term contracts and other factors, only to increase after a considerable period of time. The graph takes the shape of the letter J.

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The Economics of Crisis

1. Structure of the 2008 Global Financial Crisis

2. Quantitative Easing (QE)

An unconventional monetary policy used when economic recovery is insufficient even after lowering policy interest rates to 0%.

• The central bank directly purchases large quantities of medium-to-long-term government bonds and asset-backed securities on a large scale → Directly supplies liquidity to the market.
• Effects: Fall in medium-to-long-term interest rates, expansion of bank lending capacity, rise in asset prices, increase in consumption (wealth effect).
• Side Effects: Emerging market asset bubbles, deepening income inequality, long-term inflation risk, uncertainty of exit strategies.

3. Relationship Between Keynes’s Liquidity Trap and Quantitative Easing