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Chapter_6_TFP_and_Starting_Dates - The Evolution of...

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1 The Evolution of International Income Levels: Total Factor Productivity and Starting Dates Chapter Overview: In this chapter, we examine whether the model calibrated to the development and growth experience of England can account for the evolution of international income levels over the last three centuries. To do this, their must be some factor or set of factors that differ across countries and that can cause differences in the start of the industrialization process for 250 years or more. The three obvious factors are Solow TFP, savings rates, and population growth rates. This chapter focuses on TFP as a potential source of the differences in starting dates. It leaves as a homework assignment the question of whether differences in savings rates could explain the differences in starting dates. After examining the size of the difference in Solow TFPs that the model predicts are needed to account for the huge differences in starting dates, the chapter proceeds to look for evidence that TFP differs across countries by the amount predicted by the theory. The chapter concludes by presenting a theory of TFP. Such a theory is needed. Telling a policy maker that if he or she wants his country to be rich, she must increase TFP is not very useful. We need to understand what determines a country’s TFP. I. Differences in Starting dates Can the model give rise to differences in starting dates of the order of 250 years or more?
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2 Equation (10) points to differences in TFP in the Solow technology, A s , as potential source of these differences in starting dates. The starting date, as you may recall, occurs in the first period when Solow TFP reaches a critical value that corresponds to the cost of producing a unit of output. Obviously, if one country has a high TFP, and the other a low TFP, they will reach their starting dates, with the lower TFP country reaching it later in time. This is represented in Figure 1. We will now examine the consequences of different values for A s for starting dates in the calibrated model of the last chapter. In particular, we will determine the difference in TFP between an early and late starter needed to generate a 250 year difference in starting dates. In this analysis, we will assume that the savings rates and the High TFP Low TFP Figure 1: Different Starting Dates time
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3 population growth rates of countries are the same. As long as this is the case the right hand side of equation (10), which defines the critical value when growth begins is the same for both early and late starters. This being the case the difference, the early starter and late starter’s starting dates satisfy θ θ - - Γ = Γ 1 1950 1 1700 s P s S UK s A A . Thus, the required difference in TFPs is . 1 1700 1950 θ - Γ Γ = s s Poor s UK s A A To determine quantitatively the difference in TFPs, we simply need to plug in the value of the capital share parameter for the Solow production function and the technology level at 1700 and 1950. The calibrated value of the capital share parameter is 3 / 1 = θ . The
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