MIT14_02F09_lec08_09

MIT14_02F09_lec08_09 - TOPIC TOPIC 4 Economic Growth Growth...

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TOPIC 4 Economic Growth
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Growth Accounting
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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
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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 Sources of Economic Growth in the United States (Denison) (Percent per year) (1) (2) (3) (4) (5) 1929-1948 1948-1973 1973-1982 1929-1982 1982-2004 Source of Growth Labor growth Capital growth Total input growth Productivity growth 1.42 1.40 1.13 1.34 0.96 0.11 0.77 0.69 0.56 0.80 1.53 2.17 1.82 1.90 1.76 1.01 1.53 -0.27 1.02 0.99 2.54 3.70 1.55 2.92 2.75 Total output growth Sources: Columns (1)-(4) from Edward F. Denison, Trends in American Economic Growth , 1929-1982, Washington, D.C.: The Brookings Institution, 1985, tabel 8.1, p. 111. Column (5) from Bureau of Labor Statistics Web site, Multifactor Productivity Trends news release, Table 1, accessed through www.bls.gov/news.release/prod3.t01.htm Figure by MIT OpenCourseWare.
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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 5 4 3 2 1 0 1947-73 1973-79 1979-90 1990-95 1995-2000 2000-2007 Average annual percent change 2.8 1.2 1.4 1.5 2.5 2.5 Figure by MIT OpenCourseWare.
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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)
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What does foster growth?
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MIT14_02F09_lec08_09 - TOPIC TOPIC 4 Economic Growth Growth...

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