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Review_session

# Review_session - Lecture 1 Long-run patterns of growth...

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Lecture 1: Long-run patterns of growth worldwide Most countries experienced substantial growth from 1870-2000. In US, income per capita was 9 times higher in 2000 than it was in 1870, reflecting a steady growth rate of 2% per year. A set of now-rich countries (US, other Europe, Japan) converged on the world economic leader (UK). But, these now-rich countries diverged from the rest of the world. Signs of convergence/divergence Q/P Time Rich Poor 1. Divergence: Rich country grows faster than poor country. 2. In other words, slope of GDP-time relationship is larger for rich country than for poor country. 3. In other words, gap between GDP-time lines for rich and poor country grow over time. 4. In other words, ratio of GDP between rich/poor countries grows over time. 1 GDP Rich/ GDP poor Divergence Convergence Time

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Data availability matters 1870 1960 1990 Ratio: Richest 17/poor with data 2.4 4.2 4.5 Ratio: Richest/poorest 8.7 38.5 45.2 Ratio of GDP per capita in rich/poor countries •Case 1: Rich start out 2.5 times richer; become 4.5 times richer. Gap doubles. ( Divergence ) • Case 2: Richest starts out 9 times richer; becomes 45 times richer. Gap widens by factor of five. ( Divergence, big time ) Lecture 2: Growth accounting in the United States, 1840-2000 Production functions: Q = A · L α · K 1- α Efficiency = Output per unit input Labor productivity = Q/L How many shoes per worker in the factory? Total Factor Productivity (TFP) = Q/ L α · K 1- α How many shoes per unit of labor AND capital in the factory? For same capital and labor stock, economy with higher “A” can produce more output.
Decomposing growth Δ Q = Δ A + αΔ L + (1- α ) Δ K Q A L K • CONCEPTUAL MEANING (*) : Mechanically, there are only two ways to increase output: (a) Increase inputs (labor, capital) or (b) develop a more efficient production process. • WORKING WITH THE EQUATION (*) : If you have information on the growth rates of Q, L and K and you know the factor proportions ( α ), you can back out an implied growth rate for A. You can determine the share of total growth due to factor accumulation versus efficiency. DERIVING THE EQUATION : (1) Q = A · L α · K 1- α (2) log Q = log A + α log L + (1- α ) log K (3) Take derivative with respect to time dQ = dA + α dL + (1- α ) dK Q A L K Two eras of growth (1) 1840-1900 α =0.68; β =0.19; γ =0.13 (2) 1900-1960 α =0.71; β =0.23; γ =0.06 Givens . (1) Q 3.98 3.12 . (2) L 2.77 1.58 . (3) K 5.40 2.63 . (4) T 2.93 1.25 Derived .

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