14.02_Lectures_8-9

14.02_Lectures_8-9 - TOPIC TOPIC 4 Economic Growth Growth...

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TOPIC 4 Economic Growth

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Growth Accounting
Growth Accounting Equation Y = A F(K,N) (production function). GDP Growth Rate = ! Y/Y Growth accounting equation: ! Y/Y = ! A/A + ! K ! K/K + ! N ! N/N Output, in a country grows from: Growth in TFP (see entrepreneurial ability, education, roads, technology, etc.) Growth in Capital (machines, equipment, plants) Growth in Hours (workforce, population, labor participation, etc). 3

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Sources of Growth New invention allows firms to produce more for given K and N ! Y/Y = ! A/A Firm’s investment increases capital stock for given A and N Firm s investment increases capital stock for given A and N ! Y/Y = ! K ! K/K Labor increases for example because of an increase in pop. for given A and K ! Y/Y = ! N ! N/N 4
US Growth Accounting 1. Measure ! Y/Y , ! K/K and ! N/N from data 2. Pick the right Production Function US Production function (from before!): Y =AK .3 N .7 US Production function (from before!): Y A K N ! Y/Y = ! A/A + .3 ! K/K + .7 ! N/N 3. Calculate ! A/A as residual ! A/A= ! Y/Y - .3 ! K/K - .7 ! N/N 5

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US Growth Accounting 6
Per Capita Growth Accounting We also care about growth in Y/N (per capita output = labor productivity). ! Y/Y = ! A/A + .3 ! K/K + .7 ! N/N ( ! Y/Y - ! N/N) = ! A/A + 3 ( ! K/K - ! N/N Y/Y N/N) A/A + .3 ( K/K N/N) We can decompose labor productivity growth into TFP growth and capital deepening (change in capital per worker (change in capital per worker) ! (Y/N)/(Y/N) = ! A/A + .3 ! (K/N)/(K/N) From 1995 in the US capital deepening increased a lot! (IT revolution) 7

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US Productivity: 1947 - 2007 8 Productivity Change in Non-Farm Business Sector. Source: BLS
Thoughts on the ‘New Economy’ • Fast output growth in the mid/late 1990s • Is it sustainable? Will it lead to higher inflation? • It depends on what is happening to productivity • “Greenspan’s gamble”: productivity is growing faster Ex-post he was right! 9

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Inflation was low and stable in the 90s! Black line - trend in CPI over time (left axis) Red line - trend in CPI inflation rate (percentage change in CPI) over time (right axis) 10 Shaded areas represent “official” recession dates (as calculated by National Bureau of Economic Research)
What does foster growth? Labor productivity growth: ! (Y/N)/(Y/N) = ! A/A + .3 ! (K/N)/(K/N) two possible sources of long run growth of output per worker: 1. Productivity growth 2. Capital deepening (higher capital per worker) Can sustained growth be driven by capital deepening, hence by Investment? We need to use a model to understand what drives growth in the long run 11

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Solow Model
Questions Model by Robert Solow (MIT Nobel laureate) Basic framework to clarify the link between capital accumulation and growth Three main questions: 1 What are the fundamental factors that affect growth 1) What are the fundamental factors that affect growth? 2) How does growth evolve over time? 3) Will the poor countries catch up?

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14.02_Lectures_8-9 - TOPIC TOPIC 4 Economic Growth Growth...

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