Growth and Development Flashcards
What is Aggregate Production?
AP realtes output to inputs
The production function : Y = AF (K, L, H)
A = Total factor productivity
K = Physical Capital
L = Labour
H = Human Capital
Can be rewritten as Y = AK(α) (HL)1−α
What is physical capital and how does it change over time? (3)
Physical Capital -> Plant, property & equipment
It changes overtime with Depreciation, Destruction and New Investment
What is labour and how does it change over time (3)
Labour is units of work effort (total hours)
It changes overtime with population growth, change in the fraction of the population employed and change in average hours worked.
What is human capital, how does it change over time (2), and how do we measure it (3)?
Human capital is the efficiency of labour
It changes overtime with education & demographics
It is measured through average educational attainment, test scores and educational expenditures
What is total factor productivity, what does it depend on (3), how does it change over time (2) and how do we measure it (1)?
Total factor producitivity is how efficiently an economy employs its inputs
1. It depends on the allocation of inputs within companies, across companies in the same sector and across sectors
2. It changes overtime with political reform and tech progress
3. We measure it residually
Why are the income gaps so large (theories) (3)
It could be…
1. Differences in factors of production
2. Differences in technology levels across countries
3. Institutional features of different countries
How might misallocations cause low productivity?
Firms are different even at high levels of disaggregation
Examples include 4 door sedan producers, restaurants, airlines
How is the efficient firm size distribution determined?
Firm size should respond to efficiency -> Size should decrease in costs and should rise with demand for good
Inefficient size distribution lowers aggregate productivity
Why might a size distortion occur?
Usual suspect is government policy however it can also happen if we subsidize some firms or sectors by taxing others. Thus, subsidized firms grow inefficiently large and tax firms become inefficiently small.
What are the reasons for misallocations? (3)
While the results are very similar : large misallocations in EEs, no one factor accounts for most misallocation
The usual suspects are…
1. Trade frictions
2. Financial frictions
3. Industrial policy frictions
What are the indirect effects of misallocations? (2)
Some indirect effects include…
1. Slowing down technology adoption and diffusion
2. Distorting the decision to operate in markets
They can be as large as the direct effects
What happens with technology adoption and misallocations?
Technology adoption by firms is expensive therefore the decision is linked to anticipation of firm growth. Therefore misallocation reduce tech adoption as factors that impede firm growth make it unattractive
What is the selection effect
The selection effect is when misallocations change who participates in markets as firms can choose not to participate. This changes the firm-size distribution and impacts aggregate productivity
Concluding thoughts (4)
- Productivity is a big reason for cross-country income gaps
- Explanations for productivity differences are many
- Systematic empirical evidence tends to be difficult
- Misallocations have been a promising avenue
