Ch 3. Introduction to economic growth Flashcards
What factors correlates with economic growth?
Most macroeconomic models consider output by firms is given by the following production function:
Y = AF (K,L)
* Y output of final goods and services
* A technology, an index of eciency in the use of inputs
* K physical capital
* L labor
Is Y = AF (K,L) good enough?
Explore why and how to
No, These variables are not enough to explain:
* Sustainable economic growth
* income differentials across countries
An important explanatory variable: Total Factor Productivity (A). Not directly observable (Solow Residual): amount of ouput growth that remains after we have accounted for the determinants of growth that we can
measure direclty.
Basically TFP is a “catch-all” for anything that effects output other than K and L
About K, L and A
Technological progressrotates the production function upwards.
* This increases the Average Product of Labor (APL) and offsets the diminishing marginal returns to capital…
* Which makes it profitable to invest domestically, leading to increased capital intensity.
Recepie for succes of the todays rich countries
Capital intensity of production: capital goods per worker
Labour productivity: output per worker
Countries that are rich today have had labour productivity rise over
time as they became more capital intensive.
* Unlike the concave production function (see slides ut 3 pg 11), capital productivity remained roughly constant over time in the technology leaders.
* This is because these countries experienced a combination of capital accumulation and technological progress.
What factors affect a country’s economic growth rate?
To understand this, it is useful to express real GDP per capita as the
product of two terms: average labor productivity and the proportion
of the population that is working.
Y/POP = Y/N x N/POP
Let Y be the total real output (measured, for example, by real GDP), N the number of employed workers and POP the total population. According to this, real GDP per capita (Y/POP) is equal to the output per employed worker (Y/N) times the proportion of the population that is working (N/POP).
The amount of goods and services that each person can consume thus depends on the amount that each worker can produce and the number of people (as a percentage of the total population) who are working.
Determinants of average labor productivity (Bernanke and Frank, 2007):
- Human capital
- Physical capital
- Land and natural resources
- Technology
- Entrepreneurship and management
- Political and legal climate: institutions
