Week 5: Growth Accounting Flashcards
Growth accounting
determines the sources of growth in an economy and how they may change over time
What explains the difference in TFP levels? (2)
- Difference in capital per person explains about 1/3 of difference
- TFP explains remaining 2/3
Why are rich countries rich? (2)
- They have more capital per person
- They use labour and capital more efficiently – more important
Applied growth rate rules to production function (new equation)
Adjust growth rates by labour hours (new equation)
What is TFP growth also known as?
The residual
Human Capital
Stock of skills that individuals accumulate to make them more productive – education and training
What are returns to education?
value of the increase in wages from additional schooling
Increased productivity via investment in human capital
What type of investment in education can increase productivity?
investment in state schools, subsidised loans for university and college
Trade -off of Investment in Human Capital
spending a year in school requires sacrificing a years wage now to have higher wages later
How is health and productivity linked?
Healthier workers = more productive
S Koreas calorie intake fact
S Korea – over 1962 – 95 caloric consumption increased by 44% and economic growth was spectacular
Why are institutions in place?
To foster human capital and technological growth
Examples of institutions
– property rights
- the rule of law
- gov systems
- contact enforcement
Property rights
have the ability to exercise authority over the resources they own e.g. rule of law, expropriation
Why are property rights needed?
Markets cannot work is there is no respect for property rights
What are the results of a corrupt government?
Less investment (including from abroad) and economy is less efficient - results in lower living standards
Misallocation of Resources
a situation in which capital and labour are poorly distributed so that less productive firms receive a larger share of capital and labour than they should according to level of productivity
3 Categories of Capital
- Private capital stock
- Public infrastructure
- Human capital
2 viewpoints to allocate investment in economy
- equalise tax treatment of all types of capital in all industries and let market allocate investment to the type with highest marginal product
- Industry policy
Industrial Policy
gov actively encourage investment in capital of certain types or certain industries because it may have pos externalities that private investors don’t consider
Issues with industrial policy
- Government may now have the ability to ‘pick winners’ (choose industries with the highest return to capital)
- Politics rather than economics may influence which industries get preferential treatment
Why is establishing the right institutions important?
Important for ensuring resources are allocated to best use
Methods to encourage technological progress
Patent laws: encourage innovation by granting temporary monopolies
Tax incentives for R&D
Grants to fund research un universities
Charter Cities
where an economy agrees to set the rules by which a new city is administrated
Radical Changes in Demographic Composition of Society - Equation
Radical Changes in Demographic Composition of Society - FOC Equation and relationship
Structural Transformation
the transition of an economy from low productivity and labour-intensive economic activities to higher productivity and skill intensive activities
What happens in sectors when economy develops?
As economy develops, employment and value added:
- In the agricultural sector decline
- In manufacturing, first increase then decline
- In services increase
What happens to sectoral productivity growth when economy develops?
- Higher in agricultural sector
- Medium in manufacturing
- Lowest in services
Production Function for Growth Accounting
What does A stand for in the production function for Romer Model?
Accumulation/stock of ideas
What does the negative relationship between education and fertility?
The higher the education, the lower the number of desired kids
Why does sectoral composition change with development? Model
Why does sectoral composition change with development? Model in equilibrium
Why does sectoral composition change with development? FOC applied
What happens in sectoral composition change with development when in equilibrium?
must be that production is fully consumed
How to calculate TFP?
Use the cobb-douglas production function and solve for A
How to calculate growth rates?
(final value - initial value)/final value
x100 for %
