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10_1_Notes - isolated USSR(b the best performance is...

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Econ 4730 F2008 10/12008 TFP is a flawed but widely used and generally useful tool in many occasions, that can go seriously wrong in important issues one deals with. Origin: Solow (1957) Concept: Trying to isolate the rate of output growth that cannot be explained by the growth of all inputs, when the aggregate production is approximated by a loglinear formula ie, the Cobb-Douglas production function. Major problems: Cannot handle flow-input, flow-output problems with major time-separation between short-term cost and long term benefit, and therefore inapplicable to the breaking out of an economy from stagnant stasis, where much up-the-front spending must be made. Consequence: This approach claims that the East Asian high growth cannot last forever, which is a correct prediction (true for all catching – up growth, also predicted by the benchmark model, due to the exhaustion of technological backlog), but then four errors are committed: (a) the end of high growth is viewed as the same as happened to the
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Unformatted text preview: isolated USSR (b) the best performance is awarded to Botswana Congo, Egypt, and Pakistan, (c) no useful technology transfer is recognized, (d) the beneficial role of export is denied. Reason why the approach of the growth of total factor productivity gets wrong: It is the neglect of the heterogeneous nature of capital, or a misspecification of the aggregate production function. At the country level, there are ‘fast-depreciating capital spending’ on machines, for example, and ‘slow-depreciating capital spending’ on infra-structure for harbor and roadwork. During the initial stage, both must be spent in large measure, while later, much less would be spent on average, over the maintenance for the second type. Similarly, at the industry level, the pioneering firm needs to spend on start up cost for launching an industry, and at the firm level, the case of Hyundai in sustaining sunk costs over years to develop the American market....
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