Macroeconomic PolicyClass NotesLong run growth 4: A theory of TFPRevised: October 24, 2011Latest version available atwww.fperri.net/teaching/macropolicyf11.htmIn the previous class we established that TFP and TFP growth are prerequisites forreturns to capital, factors accumulation and growth. In this class we briefly explorewhat are then the determinants of TFP.The first order determinant of TFP is technological discoveries that make existingcapital and labor more productive.For example think about the invention of thecompass. Without the compass 10 sailors and a ship are capable of producing onlya limited amount of shipping services as they will get lost very easily.When thecompass is created the same 10 sailors and the same ship are going to be able toproduce much more shipping services.More recently think of the invention of theGoogle search algorithm.Technological innovations are a very important driver ofTFP growth in developed economies (like US). Figure1for example shows the someestimates contribution of information technology to labor productivity (note thatlabor productivity is different from total factor productivity) in the US. To give youa reference on the magnitude of those numbers the increase in labor productivityis larger than the one that the steam engine brought in UK during the industrialrevolution.How about in developing countries?Developing countries should have an advantage over developed countries as theyshould be able to adopt more advanced technology from more advanced countries,without the need of reinventing it. Indeed in figure2below we see that countries thatreached a certain income level (2000 1990US$) late in the current century were ableto double their income at a much faster rate than countries that reached the samelevel the previous century. US for example reached the level in 1860 but it took morethan 40 years to double that level as improvements in productivity were obtainedonly through technological discoveries. Taiwan instead was able to double the incomefrom 2000 to 4000 in less than 10 years because it was able to increase productivityby adopting better technology that were already around.
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A theory of TFP2Source: Oliner and Sichel (2003)ICT Contribution to US Labour Productivity Growth (% points per year)00.511.521974-901991-951996-2002Figure 1:The contribution of information technology to US laborproductivityFigure 2:Years to double GDPYet we have seen many examples of many developing countries where TFP (and