different concepts. Our main goal is to look at policy efforts that may have an impact on TFP growth and through this channel in economic growth. It is true however that growth accounting may be useful in stimulating the development of new theories of growth.
19 Recent studies build on the idea that TFP is not an important source of growth (for example, Young, 1995). In our opinion, whether TFP calculations are large or small is not a relevant issue for growth theory, unless we have a satisfactory theory of what makes TFP large or small. We know of the importance of input accumulation for growth. We have quiet satisfactory theories of how input accumulation occur. Differences in growth due to differences in capital accumulation are easily understand by the profession. We have a lot of insights of why investment rates differ across countries. However, we don’t have many insights of why TFP rates differ across countries. And as this paper shows the differences can be large. In accordance with the theory of economic growth and hence compatible with the framework developed above we think of TFP as influenced by a wide mix of economic policies and institutions. Keeping it very simple we can think about the growth process in a very decentralized way as follows p y w l k i i i i i i i n i n i n = = = ∑ ∑ ∑ = + 1 1 1 ρ . This equation represent the well-known identity that total value added for an economy equals payments to productive factors where the subscripts stand for the different industries (or firms) of the economy. These factors are defined without a loss of generality as capital and labor. If the former equation holds so does the following: p y y p w l l w k k i i i i i i i i i i i n i=1 n i ∆ ∆ ∆ ∆ ∆ ∆ρ + = + + + = = = = = ∑ ∑ ∑ ∑ ∑ ∑ ρ i n i i n n i n i 1 1 1 1 1 Rearranging we get an expression for the residual R: p y w l k l w k y p i i i i i i i i i i i n i=1 n i ∆ ∆ ∆ ∆ ∆ρ ∆ - - = = + - = = = = = ∑ ∑ ∑ ∑ ∑ ∑ ρ R i n i i n n i n i 1 1 1 1 1 The left hand side of this last equation reflects the traditional measure of the residual. The right hand side of this expression can be understood as its “dual”. A more careful look at this expression is useful. It help us to disentangle what the residual is all about. Specifically, it shows that the residual will be positive if there are efficiency gains. Why? The expression is positive only if the rewards to the existing production factors
20 increase (decrease) by more (less) than the increase (decrease) in revenues associated to the increase (decrease) in prices of a given output. This is only possible if some efficiency gains occur along the productive process. This expression doesn’t mean necessarily that it is possible to increase efficiency by keeping output and inputs constant. The productive process is very dynamic and of course some rearrangements will take place in the process of increasing efficiency.
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- Summer '18
- Sagar Arora
- The Land, TFP