File 1: Growth in Productivity Flashcards
From when to when did productivity increased in Canada, UK and the US a lot?
1970-1979
What is labour productivity?
output/unit labour of input (#hours worked or # of employees)
What is total factor productivity?
output/total input (labour and capital input)
Rises in productivity is associated with
increase in living standards
Why do we focus on labour productivity?
Because it is easier to measure such as measuring GDP=value of output produced by economy that can measure output
The 2 ways to generate GDP are:
- summing expenditures (total expenditure required to buy output) 2. Summing income and claims on value of output (expenditures)
Expenditures include (4):
consumption, investion, government purchases, net exports
Income include (4):
wages, rent, interest, profit
GDP is not a good measure of living standards in the point of view of expenditures.
expenditures on steel pipe: there are also expenditures on the energy used to manufacture the pipe. If you add both expenditures in the calculation of GDP = DOUBLE COUNTING because the energy that goes into its manufacture is an intermediate good. Therefore, part of the purchase price of the pipe includes the enegery that goes into the manufacturing of the pipe.
=> do not count expenditures on goods/services that are used to produce other goods or services because they are included in the final price
Problem of GDP as an estimator of living standards: Government expenditure
Government purchases:
- if you purchase an Ipad: this is an example of consumption expenditure. You wouldn’t buy an Ipad unless you were better off and buying a second Ipad would not benefit you. Therefore everytime someone buys an Ipad. we can conclude that the person is better off
- If the government spends money on roads/hospitals/senators salaries/building an arena (government spending contributes to GDP). When a government spends, the purchases are in a way involuntary: government decides for you.
What does Tyler Cowen argue about government expenditures and GDP?
Tyler Cowen: argues that some expenditures in the US are poorly conceived: US spends around 15% on health and life expectancy is 77.9 yet Chile spends 5% of their GDP on health and their life expectancy is 78.6
Also: US spending on education has risen yet reading and math score shave not
=>the rise in government speding is not closely linke to improved performance or well being
Problem of GDP as an estimator of living standards: wasteful expenditures.
some expenditures simply do not contribute to improving well being=wasteful expenditures: example, gas consumed in a traffic jam
Problem of GDP as an estimator of living standards: home ownership
GDP does not take into consideration home ownership after mortgages are paid off. Yet homeownership is a major source of living standards.
To assign value to home owners (after mortgage paid off), statiscians use expenditures on rental property to estimate the value of home owners (a problem because rental property and owned homes differ)
Problem of GDP as an estimator of living standards: improvement in quality
- a modern laptop is a better machine than the PCs sold in the 1980s but their are a lot less expensive
- Hedonic Indexes: consider quality improvement by the price margin between the good with the improvement and the good without the improvement to determine the value of the improvement, subsequent inflation adjustments
quality improvements of computers and cars are considered in GDP, but there are lots of goods (whose quality has imrpoved) for which there are no hedonic indexes
Problem of GDP as an estimator of living standards: Free products
Free information and services (Facebool) via the web: expenditures on supplying such information are included in GDP: the improvement of well being from such information is not considered in GDP
Problem of GDP as an estimator of living standards: illegal activities
illegal activites (drugs, prostitution, bribes):
- Italy included drugs and prostitution in GDP
- UK started adding expenditures on prostitution in GDP by estimating on & off street prostitutes, assuming # changes proportionally to male population & acquiring information on prices charged by prostitutes
Problem of GDP as an estimator of living standards: GDP per capita
in countries with high inequal GDP/capita is a poor indicator of the well being of the population
Problem of GDP as an estimator of living standards: spillovers
expenditures and incomes may have spillovers (such as pollution) to which no price is attached: GDP does not take into account spillovers
Problem of GDP as an estimator of living standards: intermediate goods
1.problem with determining what an intermediate good is: expenditures on intermediate goods not considered in GDP (due to double counting, price of intermediate good incorporated in price of good).
IP (intellectual property) is treated as intermediate good: a firm spends money on R&D which gives IP which contributes to product sold. But R&D overtime yield benefit => tendency to shift R&D leading to IP as a capital investment thus contributing to R&D
Australia started incorporating IP&RD into their GDP and their GDP got higher than Canada: Canada then did the same and their GDP became higher.
=> IP has durable value and is a decision a coutnry makes wheter to consider it as a intermediate good
What is increasingly treated as sufficiently durable to classify as an investment expenditures that goes into GDP?
development of IP, software, organization
What is a tangible investment? intangible?
tangible investment: investment in building machine to produce a product
intangible investment: investment in IP, software, organization
What do Haskel and Westlake argue?
Westlake and Haskel argue that intangible investment have grown and that they have distinct characteristics:
- SCALABILITY
tangible: additional ouput: production of additional pipes means additional expenditures (scale economies)
intangible: can increase output w/ no additional cost: a design for a jet can be applied for many jet engines w no addtional cost = scalability (can be use in many places at same time = non rivalry) - SUNKENNESS
tangible: have a resell value (equipment…)
intangible: does not have a resell value (if sb went out of business, cannot sell manuals and training programs) - SPILLOVERS
tangible: no copying is allowed because of IP (patents, copyrights, trademarks)
intangible: easily copied=spillovers - SYNERGIES
=combination of tangible and intangible investments or intangible investments together (ex: Raytheon developed expertise in microwave for military. in order to dev line in kitchen appliance, they bought Amana a kitchen appliance design)
How do scalability, sunkeness, spillovers and synergies impact intagible investments?
- Scalability: business that invest in II (intangible invest) can get large very quickly => makes entry for competitors difficult
- Sunkeness: absence of recoverable assets make banks relunctant to make loan or investment firms to buy bonds
- Spillovers: reduces incentive to invest, becomes major responsibility of manager, may encourage concentration of economic activity in cities, areas (silicon valley)
- synergies: provide focus for management, encourage open innovation
Gordon points out the following improvements in living standards between second half of the 19th century to the middle 20th century:
- # people living in same household fell (thus increase in living space)
- tenement house replaced w single family homes
- development of streetcar=> rise of suburbs
- decline in # lodgers
- home ownership increased
- development of networked house: electricity, running water, indoor dlush toilets, central heating (gordon argues gdp increase did not represent the improvement in living standards they brought)
- radio, washing machine, firdges become available
- candles to gas lamps (fire hazards, poor lighting) to electric light
