Applied Economics 8703
Lecture #21
Empirical Studies of Economic Growth
I. Introduction
There is very convincing evidence that economic
growth is needed to increase the quality of life in
developing countries.
Yet there is less agreement on
what economic policies lead to economic growth.
In recent decades, many economists have used cross-
country regressions (regression analysis where
countries are the units of observation) to investigate
the determinants of economic growth, and the impact
of economic growth on indicators of the quality of
life.
The recent increase in analysis reflects a big
increase in the availability of data as well as the
growing realization that economic growth is crucial
to improve the quality of life in developing countries.
This lecture examines several recent studies to give
you an idea of what people have done, and how
convincing the evidence is.
Note that many people
(including me) are skeptical that much can be
learned, due to serious econometric problems, yet
careful analysis of cross-country data may be useful
for answering at least some questions.
1

II. Growth Econometrics (Durlauf, Johnson and
Temple, 2005)
The authors begin by presenting some stylized facts:
1.
Most countries had positive growth rates in
output per worker from 1960 to 2000, but there
is a wide variation in growth rates (including
some negative ones), and output per worker in
1960 has no (unconditional) predictive power
for subsequent growth rates.
2.
The correlation in decade average growth rates
is increasing over time, suggesting that distinct
“winners” and “losers” are emerging over time.
3.
The lowest growth (on average) is in Sub-
Saharan Africa, and Latin America is also weak.
East Asia is the strongest.
4.
For most countries, economic growth rates from
1980 to 2000 were lower than the 1960 to 1980
rates.
Two important exceptions: China & India.
Growth Theory
Before examining theoretical models, the basic
variables must be defined (country i at time t):
2

Y
i,t
total output
L
i,t
= L
i,0
e
n
i
t
total labor (which grows at rate n
i
)
y
i,t
= Y
i,t
/L
i,t
output per worker
A
i,t
= A
i,0
e
g
i
t
level of (labor augmenting)
technological progress
y
i,
E
t
= Y
i,t
/(L
i,t
A
i,t
)
output per “efficiency unit of labor”
Consider y
i,
E
t
, which may appear odd at first glance.
“Efficiency units of labor”, L
i,t
A
i,t
, is the amount of
labor at time t
measured in terms of labor efficiency
at time zero
.
For example, if there are 100 workers at
time zero and 100 workers at time t, and technical
change has made labor 30% more efficient, then there
are 130 efficiency units of labor at time t.
Efficiency units of labor grow at the rate n
i
+ g
i
, so
that L
i,t
A
i,t
= L
i,0
A
i,0
e
(n
i
+ g
i
)t
.
Dividing total output by
efficiency units of labor gives y
i,
E
t
, output per
efficiency unit of labor.
In general, as long as there is
some kind of technical change output per capita, y
i,t
,
will grow even when the economy is in equilibrium.

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- Economics, Regression Analysis, per capita, Durlauf, Empirical Studies of Economic Growth