Topic8-Growth_AAP

Topic8-Growth_AAP - Long-Run Economic Growth LongFacts,...

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Unformatted text preview: Long-Run Economic Growth LongFacts, Growth Accounting, Solow Model, Solow Model with Productivity Growth (Technological Progress), Policies to Promote Growth Topic 8 (Text: Chapter 6; Pres Topics #3, #4, & #5) 1 What Developed Countries Look Like Note Ireland, Switzerland Real Per Capita GDP : Developed Countries 40,000 GER_rgdpeqa JPN_rgdpeqa 35,000 USA_rgdpeqa SGP_rgdpeqa 30,000 CHE_rgdpeqa GBR_rgdpeqa 25,000 IRL_rgdpeqa 20,000 15,000 10,000 5,000 0 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 19 01 20 04 20 5 Difference Between High and Rising Relative Total per Capita Real GDP Growth: Developed Countries 18 16 GER_RGDP JPN_RGDP USA_RGDP 14 SGP_RGDP CHE_RGDP 12 GBR_RGDP IND_RGDP 10 8 6 5.8 ~ 3.3%/yr 17 ~ 5.4%/yr 4 2 0 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 19 01 20 04 20 6 1 1 What Developing Countries Look Like Winners and Losers Both Real Per Capita GDP : "Developing" Countries 40,000 ARG_rgdpeqa CUB_rgdpeqa 35,000 IND_rgdpeqa MEX_rgdpeqa 30,000 USA_rgdpeqa RUS_rgdpeqa 25,000 VEN_rgdpeqa ZWE_rgdpeqa CHN_rgdpeqa 20,000 15,000 10,000 5,000 0 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 86 19 83 19 89 19 92 19 95 19 98 19 04 20 01 20 7 Not Every “Developing” Country is Developing Developing” No China Here Relative Total per Capita Real GDP Growth: "Developing" Countries 12 ARG_RGDP CUB_RGDP IND_RGDP 10 MEX_RGDP USA_RGDP RUS_RGDP 8 VEN_RGDP ZWE_RGDP 6 4 2 0 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 19 01 20 04 20 8 Not Every “Developing” Country is Developing Developing” And This Is Why! Relative Total per Capita Real GDP Growth: "Developing" Countries 40 ARG_RGDP CUB_RGDP 35 IND_RGDP MEX_RGDP 30 USA_RGDP RUS_RGDP 25 VEN_RGDP ZWE_RGDP 20 CHN_RGDP 15 10 5 0 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 19 04 20 01 20 9 2 2 The Most Important Economic and Public Policy Issue Today: • Where does growth come from? Can we predict future growth? Can How do we deliver high growth? How 10 The Most Important Economic and Public Policy Issue Today: • Where does growth come from? Can we predict future growth? Can How do we deliver high growth? How 16 Growth Basics GDP Capital & Labor Productivity 17 3 3 A Short Overview • We use the same production function apparatus • Growth in output comes from all 3 elements of the production function Y = A*F(K,L) Recall growth accounting Recall • Per capita growth (Y/L) comes from K & A Recall A is TFP Recall 18 A Short Overview • It turns out that steady increases in K (through investment) cannot generate continuous growth of Y/L Culprit: diminishing returns to factors Culprit: • It can deliver a high standard of living can 19 A Short Overview • Continuing increases in A (TFP) are then responsible for the continuous growth of Y/L that we observe? • We know less about TFP than about K & L • There is no generally accepted fully developed theory of TFP growth We do know a lot about the ingredients for this We growth 20 4 4 Facts “Progress is the process of exchanging old troubles for new ones.” -- A fortune cookie ones.” • Small differences in the long run growth rate can translate into large differences in income levels • There are large and persistent differences in per capita income levels across countries levels • There are dramatic differences in growth rates rates across countries More than 5% in 1960-90 for Japan, Singapore, Hong Kong; More 1960close to 0% for Uganda, Uruguay, Honduras 21 Facts (cnt.) cnt.) • Start with the happens with time: Growth Rates 10 1.0% 10% 1.0% 2.5% 28% 5.0% 63% 7.5% 106% same income. Here is what different growth rates over Years 25 50 100 28% 64% 170% 85% 244% 1,081% 239% 1,047% 13,050% 510% 3,619% 138,208% 22 Long Run Growth World Per Capita GDP over Time: Growth Rates 3% 2% 1% 0% 0-1000 1000-1500 1500-1820 1820-1870 1870-1913 1913-1950 1950-1973 1973-2000 -1% Year 23 5 5 Sources of Growth • Growth in Labor, L, comes from: population growth (from all sources) population increases in labor participation increases • Growth in Capital, K, come from: investment (enabled through saving) investment • Growth in TFP, A, comes from: innovation, and innovation, a large list of forces large Least understood and yet most important element Least 24 Growth Accounting Review • The process of accounting for the sources of sources economic growth: Recall for the C-D production function: CΔY/Y = ΔA/A + α (ΔK/K) + (1-α) (ΔL/L) (1ΔA/A is the TFP growth rate Captures growth in output over and beyond what can be Captures accounted for by measurable inputs measurable Backed out as a residual Backed Different from labor productivity growth Different ΔAL/AL = ΔY/Y - ΔL/L 25 Growth Accounting • The 1970s saw a sharp decrease in TFP growth 1.53% for 1948-73 but -0.27% for 1973-82 1.53% 19481973- • Some explanations offered are: Measuring quality improvements is hard Measuring Health, environment, and worker safety regulations Health, Large increases in oil prices in 1973 Large “1974”; the IT revolution learning takes time 1974” learning 28 6 6 Growth Accounting in United States (percent per year) 1929-1948 1948-1973 1973-1982 1929-1982 Source of growth labor growth 1.42 1.40 1.13 1.34 capital growth 0.11 0.77 0.69 0.56 total input growth 1.53 2.17 1.82 1.90 productivity growth 1.01 1.53 0.27 1.02 total output growth 2.54 3.70 1.55 2.92 29 Growth Accounting in the U.S. Table 6.3 Sources of Economic Growth in the US (Denison) % 1929-1948 1948-1973 1973-1982 1929-1982 1982-1997 Sources of Growth Labor Growth 1.42 1.40 1.13 1.34 1.71 Capital Growth 0.11 0.77 0.69 0.56 0.98 Total Input Growth 1.53 2.17 1.82 1.90 2.69 Productivity Growth 1.01 1.53 1.02 0.76 -0.27 Total Output Growth 2.54 3.70 1.55 2.92 3.45 30 The Solow Model • Growth accounting informs us about the sources of growth • It does not explain why growth occurs explain why and how A, K, L, grow in the first place? why • The Solow model is our starting point to understand the process of growth • For studying the standard of living, growth in per worker (or per capita) quantities is per what matters Rather than in total quantities Rather total 31 7 7 The Solow Model (cnt.) cnt.) • Consider the C-D production function CY = A KαL1- α • Rewrite it as Y = A( Kα L-α)*L Y = ( A kα ) * L α and Y/L = A k Y/L where y = Y/L, k = K/L where The output-to-labor ratio (per capita Y) The output- toThe capital-to-labor ratio The capital- to- More generally, y = A f(k) More 32 Solow Model (cnt.) cnt.) • We will use the model for two purposes: 1. Determine the allocation of output to consumption and savings (and therefore investment) The savings/investment decision The 2. See how the saving/investment decision results in capital accumulation 33 Solow Model -Allocation Allocation of output (Demand for Goods) • y = c + inv inv c = C/L, inv = I/L, g = G/L inv assume G = 0, economy is closed assume • In equilibrium, inv = saving per capita inv (done by people ) • Assume consumers save a constant fraction “s” of their income y • Saving = inv = s y = s A f(k) inv 34 8 8 Solow Model -Allocation (cnt.) cnt.) • Combine the two equations: y = c + s y, or c = (1- s) y c = (1- s) A f(k) (1(1For the CD function: For c = (1- s) A kα (1sav = s A kα Income that is not saved is consumed Income 35 Solow Model -Accumulation Capital accumulation • Recall the two uses of investment: δ k –replenish depreciated capital; capital stock falls as old capital depreciates The capital depletion line The capital Δ k –increase in the capital stock; capital stock rises capital as firms invest in new equipment This is all per/capita This inv = Δk + δ k 41 Solow Model -Accumulation (cnt.) cnt.) Change in capital = Investment – Depreciation We call this net investment We Δk = inv - δ k inv and since inv = sy from S = I and inv sy Δk = sy - δ k sy Δk = s A f(k) - δ k, or or Δ k = s A kα - δ k At low levels of k, δ k is low, MPK is high, At MPK and Δk > 0 At high enough levels of k, δ k is high, MPK is low, At MPK and Δk < 0 42 9 9 Accumulation Example #1 • How investment is allocated Equilibrium k* = 6.6608, s = 30%, δ = 8%, A = 3 Equilibrium • k; 1.193 3.040 4.999 6.502 inv - δk = Δk 0.316 0.095 0.221 0.419 0.243 0.176 0.486 0.400 0.086 0.526 0.520 0.006 a 44 Accumulation Example #2 • How investment is allocated Take an example: k = 4.0 Take s = 30%, δ = 10%, A = 3, α = 0.5 (easier) • y= • s= (per capita output) (per = inv inv 45 Accumulation Example #3 • Take another example: k = 36.0 s = 30%, δ = 10%, A = 3, α = 0.5 • • • • • y= s= δk= Δk= k+1 = = inv inv 53 10 10 Solow Model Equilibrium (cnt.) cnt.) Short-run equilibrium of the economy Short• When savings = investment, the economy is in short-run, or momentary equilibrium shortIt means that resources are not wasted It All the output is paid out to the factors of All production The interest rate equilibrates demand and supply The Δk <=> 0 56 Solow Model Equilibrium (cnt.) cnt.) Long-run equilibrium of the economy Long• Steady State (SS) • In steady state Δk = 0, and investment is just enough to offset depreciation When the economy gets there, it will stay there When • k* denotes the steady state capital stock s A f(k*) = δ k*, or s A k*α = δ k* or The C-D solution is: The C⎛ sA ⎞ k* = ⎜ ⎟ ⎝δ ⎠ 1 1−α 57 Solow Model Equilibrium (concl.) concl.) Some Properties of the steady state • The equilibrium MPK is: MPK dy/dk = α Ak α-1 αδ /s αδ • The equilibrium interest rate is: r = αδ/s - δ δ (α/s –1) 58 11 11 Equilibrium Example • Let s = 16%, δ = 8%, α = 0.30, and the production function be 1.5*kα 1. Draw the equilibrium 2. What is the equilibrium k (k*)? 59 Implications of the Solow Model • Starting from scratch scratch With a savings rate of 30%, we can achieve With 90% of equilibrium k in 49 years 99% of equilibrium k in 90 years 100% of equilibrium k in 222 years 63 Implications of the Solow Model (cnt.) cnt.) • In the long run (at steady state), there is NO growth in per capita output Capital, income, and consumption per worker reach Capital, values that don’t change don’ In steady state, all the investment goes to replace the In depreciated capital This model cannot be used to explain differing This long-run growth performances, but has other longreasonable predictions 64 12 12 Implications of the Solow Model (cnt.) cnt.) • A permanent increase in the saving rate permanent (from s1, s2 > s1) increases the steady-state increases steadycapital stock and output • In the data, countries with higher saving rates do have higher levels of income 65 Implications of the Solow Model (concl.) concl.) • A permanent increase in the saving rate leads to permanent faster growth only temporarily (i.e. in the short temporarily run) The economy grows till the new steady state level of capital The and income is reached (consumers become richer) • Increases in the saving rate cannot explain long-term, sustained growth longWe say increased saving has a pure level effect We level Diminishing MPK prevents sustained growth Diminishing MPK 66 Solow Model with Pop. Growth • When the labor force (or population, loosely) grows at the rate “n”, the capital depletion line becomes (δ + n) k Each new worker needs to be provided with capital Each • The accumulation equation becomes: Δk = s Af(k) - (δ + n) k Steady State Steady s Af(k) = (δ + n) k, or or s Akα = (δ + n) k 67 13 13 Implications of Population Growth • An increase in “n” decreases the steady increase state level of capital and per capita income ⎛ sA ⎞ k* = ⎜ ⎟ ⎝δ + n⎠ 1 1−α A larger workforce could result in higher total larger total income, but not higher per capita income per High population growth rates tend to go with low High per capita incomes in the data 68 Fertility Compared 71 Fertility Rates 72 14 14 The Golden Rule • Increasing the savings rate does not necessarily increase consumption Higher s higher k and higher depreciation Higher higher An increasing proportion of output is used to An replace depreciated capital A consequence of diminishing MPK consequence MPK 90 The Golden Rule (cnt.) cnt.) • The steady state with the highest consumption is called the golden rule level golden of capital accumulation There is one saving rate that produces the golden There rule level of capital s=α It is optimal for all generations in the long run It But to get to this level of saving, the current But generation will have to cut down its consumption If s > α then all generations benefit by a reduction If 91 Properties of the Golden Rule • In the Golden Rule equilibrium, the tangent to the production function is parallel to the capital depletion line by construction by • Thus, MPK = δ + n = r + δ MPK • This then means that the equilibrium interest rate is: r=n 92 15 15 Some Tradeoffs The table shows the % of maximum achievable consumption under alternative savings rates and population growth rates. δ = 10%, α = 0.30, no TFP growth n 0.0% 1.0% 2.5% 5.0% 15% 90.2% 86.6% 82.0% 75.8% s 20% 96.1% 92.2% 87.3% 80.7% 25% 99.1% 95.1% 90.1% 83.3% 30% 100.0% 96.0% 90.9% 84.0% 94 Example #4 The economy’s production function is y = 3k0.5; the economy’ depreciation rate is δ = 10%. The saving rate is 30% and population growth is 0% 1. What are the steady-state values of k, c, y? steady- 2. What happens to c* if a) b) s goes to 20%? goes n goes to 5%? 95 Solow Model with Productivity Growth (Technological Progress) • The basic Solow model cannot create long run growth This is at odds with the evidence This • But consider what happens when productivity increases • The per worker production function goes from A1f(k) to A2f(k), where A2 > A1 100 16 16 Technological Progress (cnt.) cnt.) • This, i. i. ii. • • ↑ amount produced per worker at any k, and ↑ the amount saved at any k Both imply that steady state capital and income increase But if the productivity increase is oneonetime only, growth is only temporary 101 Technological Progress (cnt.) cnt.) • In this equilibrium, k*, is not constant Its growth rate is related to the growth rate of A Its Δk 1 ΔA = k 1−α A You don’t have to know this formula You don’ 102 Technological Progress (concl.) concl.) • Since the dawn of human civilization, people have shown remarkable ingenuity in becoming more and more productive “Factories” and banks were known as early as in Factories” ancient Greece and Rome • In the long run, the continuing rate of productivity improvement is the dominant factor that determines how quickly living standards rise 103 17 17 Sources of Productivity Growth • Growth in human capital (labor quality): education education on-the-job training on- thelearning by doing, etc. learning 104 Sources of Productivity Growth (cnt.) cnt.) • Growth in capital quality: Basic research Basic R&D Technological innovation Technological 105 Sources of Productivity Growth (cnt.) cnt.) • High Quality Physical Infrastructure: Roads, bridges, etc. Roads, Rail, Ports, trucking facilities Rail, Communications Communications Telephone, postal service, broadband Telephone, Electricity Electricity Water Water and many others and 106 18 18 Sources of Productivity Growth (concl.) concl.) • High Quality Social Infrastructure: Protection of intellectual property rights Protection Rule of law and impartial law enforcement Rule Enforcement of contracts Enforcement Promotion of open competition Promotion “Elimination” of corruption Elimination” “Elimination” of protectionism and long-term Elimination” longsubsidies Business transparency through competition and Business effective regulatory structures 107 Total Factor Productivity: Economic Organization 108 Accounting for Differences • • • The ratio of per capita GDP between the GDP advanced and the very poor countries is ~ 20 – 25. Two measured factors contribute k ~ 1.5 Human Capital ~ 2.5 • TFP then contributes the rest ~ 6 Measured by years of schooling Measured 109 19 19 A Quote • What follows is the Conclusion of “Why Some Countries Produce So Much More Output Per Worker Than Others?” by Robert Hall and Charles Jones, QJE 1999. Read the whole conclusion for yourselves Read 110 A Quote (cnt.) cnt.) Countries produce high levels of output per worker in the long run because they achieve high rates of investment in physical capital and human capital, and because they use these inputs with a high level of productivity. Our empirical analysis suggests that success on each of these fronts is driven by social infrastructure. A country’s long-run economic performance is country’ longdetermined primarily by the institutions and government policies that make up the economic environment within which individuals and firms make investments, create and transfer ideas, and produce goods and services. 111 A Quote (cnt.) cnt.) Our major findings can be summarized by the following points: 1. Many of the predictions of growth theory can be successfully considered in a cross-section crosscontext by examining the levels of income across countries 112 20 20 A Quote (cnt.) cnt.) 2. The large variation of output per worker across countries is only partially explained by only differences in physical capital and educational attainment. Paralleling the growth accounting literature, levels accounting finds a large residual that varies considerably across countries. 3. The differences in social infrastructure across differences countries cause large differences in capital accumulation, educational attainment, and productivity, and therefore large differences in incomes across countries. 113 A Quote (cnt.) cnt.) 4. The extent to which different countries have adopted different social infrastructures is partially related to the extent to which they have been influenced by Western Europe. • Using distance from the equator and language data, we conclude that our finding that differences in social infrastructure cause large differences in income is robust to measurement error and endogeneity concerns. 114 A Very New View • Some very recent research focuses on “quality of education” as an important ingredient education” In poor countries In lifespan is low lifespan fertility is high fertility Result: people go to school less (measurable) and also Result: invest less in the other components that make up education So, the resulting effective human capital differences So, effective explain more of the differences in income than schooling differences Requires much smaller differences in TFP to explain Requires the large differences in per capita GDP GDP 115 21 21 Policies to Promote Growth Policies to promote saving • Directly and by decreasing government expenditure Note the diminishing MPK argument: Note MPK Increasing saving has only short-term effect Increasing shortIt will increase per capital income It In open economy, the additional savings might flow In to other countries A country can borrow from abroad to grow faster country 116 Policies to Promote Growth Policies to ↑ productivity growth • This will have long-term effect on growth longImproving infrastructure Improving Building human capital Building Encouraging R & D through subsidies, especially if Encouraging spillovers (externalities) are large spillovers Protecting intellectual property rights Protecting Promotes R&D Promotes 117 Glossary of Terms ΔY/Y TFP AL k s f k* δ n Growth rate of output (GDP); likewise for A, K, L Total Factor Productivity Labor productivity = Y/L = y, the per worker output Per worker capital stock, = K/L; likewise for c, sav, and inv sav inv Fraction of income saved (saving rate) Per worker production function Steady state capital; likewise for y*, c*, sav* y* c* sav* Rate of depreciation Rate of population growth 118 22 22 THE END 119 23 23 ...
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