Lecture02_fall2009 - Lecture 2: A review of growth...

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Unformatted text preview: 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. Total factor productivity Start with a simple production function (Cobb-Douglas) Q = A L K 1- 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 or output per unit input (L K 1- ) Why Cobb-Douglas? Constant returns to scale and exponents = share of total factor payments Growth accounting Again, start with production function: Q = A L K 1- . We can decompose growth rate of output into: . . . . Q = A + L + (1- ) 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?...
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Lecture02_fall2009 - Lecture 2: A review of growth...

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