Module 6.1: Growth Factors and Production Function Flashcards
Preconditions for Growth
Savings and investment
Financial markets and intermediaries
The political stability, rule of law, and property rights environment
Investment in human capital
Favourable tax and regulatory systems
Free trade and unrestricted capital flows
potential GDP
the upper limit of real growth for an economy
represents the maximum output of an economy without putting upward pressure on prices
Grinold-Kroner (2002) model
E(R) = dividend yield (DY) + expected capital gains yield (CGY)
relative dynamism (rd)
captures the difference between the overall economic growth of the country and the earnings growth of listed companies.
Sustainable Growth Rate of the Economy
aggregate stock market appreciation is limited to the sustainable growth rate of the economy
Higher Potential GDP
Higher stock market returns and increased credit quality
Difference between potential and actual gdp
useful for predicting fiscal/monetary policy
Cobb-Douglas production function
The Cobb-Douglas function essentially states
that output (GDP) is a function of labor and capital inputs and their productivity.
Cobb-Douglas function exhibits
constant returns to scale; increasing both inputs by a fixed percentage leads to the same percentage increase in output.
Dividing both sides by L in the Cobb-Douglas production function, we can obtain the output per worker (labor productivity).
capital deepening
increasing capital per worker
increasing TFP
improving technology
Assuming the number of workers and α remain constant, increases in output can be gained by
increasing capital per worker (capital deepening) or by improving technology (increasing TFP).
In steady state (i.e., equilibrium), the marginal product of capital (MPK = αY/K) and marginal cost of capital (i.e., the rental price of capital, r)
are equal; hence:
αY/K = r
or
α = rK/Y
