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Ec183_Lecture2

# Ec183_Lecture2 - Lecture 2 A review of growth accounting...

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Lecture 2: A review of growth accounting with one application • Last class, we saw that the US overtook the UK as the world economic leader c. 1900 • Today, we will decompose the sources of growth into: Factor accumulation (“working harder”) and total factor productivity (“working smarter”) • We will end with the example that blurs the distinction between these two categories (natural resources) Production Functions (a review) • Q = F(K, L, T) • where: Q = aggregate output F = function mapping inputs to outputs Inputs ( a.k.a. ‘factors of production’): K = capital; L = labor; T = natural resources • F refers, quite generally, to the production process. It can include technology institutions, markets, etc.

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Total factor productivity • Start with a simple production function (Cobb-Douglas) Q = A · L α · K 1- α A = Total Factor Productivity (TFP) – For same capital and labor stock, economy with higher A can produce more output – Examples: assembly line vs. hand production; pay for performance vs. ‘to each according to his need’ • A = Q/(L α · K 1- α ), or output per unit input • Why Cobb-Douglas? Constant returns to scale and exponents = share of total factor payments Growth accounting • Again, start with production function: Q = A · L α · K 1- α . • We can decompose growth rate of output into: . . . . Q = A + α L + (1- α ) K • Two channels for growth: – Factor accumulation: add more L or K (“working harder”) – Total factor productivity: Improvements in A (“working smarter”)
Two sources of growth Working harder or working smarter? The facts: Growth rate in output Fastest growth rates posted in 19 th century. So, was the 20 th century a bust? Period

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Ec183_Lecture2 - Lecture 2 A review of growth accounting...

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