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Production and Long-Term Growth

Production and Long-Term Growth. Conceptualization. This conceptualization is a way to organize your thinking to understand many complex interrelated economic events. How does output increase?. Key to our analysis of growth will be the production function.

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Production and Long-Term Growth

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  1. Production and Long-Term Growth

  2. Conceptualization This conceptualization is a way to organize your thinking to understand many complex interrelated economic events.

  3. How does output increase? Key to our analysis of growth will be the production function Can boost output by increasing factor inputs or using inputs more efficiently

  4. Aggregate Production Function • Aggregate production function for the US: y = A k.3n.7 • y = real output (income) • k = physical stock of capital • n = labor input per unit of time • A = level of efficiency or total factor productivity (TFP)

  5. Growth Accounting is Everywhere

  6. Calibrating the Aggregate Production Function The production function is motivated by this fact: • Labor income share is consistently 70% of national income • Capital income share is 30% of national income

  7. Labor Income Share of GDP Distribution of National Income, 1994 Employee Compensation as Percentage of GNP 1959-1999 (very stable over time at 70%)

  8. US Production Function: Measurement • y, k, measured in billions of 1992 dollars. • n measured in millions of workers. • A is computed by using the production function

  9. Growth Accountingand Efficiency of the Economy • Growth-accounting equation: • The labor contribution to growth: 0.7 * % growth of labor • Capital contribution to growth: 0.3 * % growth in capital

  10. Examples of Growth Accounting Growth during 1950-73: TFP has been important labor input also important for US and Japan.

  11. Examples of Growth Accounting Growth slowed down dramatically during 1973-92

  12. Understanding efficiency • Higher A implies that the economy is more efficient • More output can be produced with the same inputs (labor and capital)

  13. Innovation and TFP Growth

  14. Learning by doing and TFP growth In New Economy same effect is achieved by using computers and other IT --- this also raises y/n.

  15. What determines TFP?

  16. Relationship between Income and Growth

  17. Open Countries Tend to Converge Open: (1) effective protection rates < 40%, (2) quotas on < 40% of imports, (3) no currency controls or currency black markets, (4) no export marketing board, and (5) not socialist.

  18. Technology Adoption Rates Differ Dramatically Across Countries

  19. The Speed of Technology Adoption is Rising Over Time Percent of U.S. Households Year

  20. Productivity growth rates in the US Where is the US productivity growth coming from since the mid 90s?

  21. Recent Productivity in the US

  22. Why Care About TFP? • Sustained Growth not possible without TFP growth • Incentive to invest related to return to capital---this falls rapidly to zero without TFP growth • Without TFP growth income will stop growing

  23. Soviet Union had no TFP growth—return to capital fell to zero

  24. International Differences in Labor Productivity

  25. Output per worker • Labor productivity is output per worker • Living standard is determined by • A: efficiency (or TFP) • k/n: capital per worker

  26. International Differences in Output per Worker Residual TFP x Education = TFP

  27. International Differences • Output Per Worker is higher in economies with • Higher Education • Higher Residual TFP (other than education) • More Physical Capital • Economies with higher TFP = Residual TFP x Education • also have more capital

  28. Convergence of Economies

  29. Does TFP growth explain convergence?

  30. TFP relative to the US

  31. Growth from 1,000,000 BC to now • Pre-Industrial Revolution stagnation in per-capita income • Industrial Revolution and TFP • Growing Income Inequality • 21st Century may be the Century of Convergence

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