Econ Lecture 7

Front 1

There are two factors that determine labor productivity:

Back 1

(1) the quantity of capital per hour worked (K/L)

(2) the level of technology (A).

Front 2

We can model aggregate output or real GDP (Y) as a function of three inputs:

Back 2

1) labor, L

2) capital, K

3) technology (A):

Front 3

Includes all types of skilled and unskilled labor basically “lumped” together.

Typically measured as aggregate hours or number of individuals employed.

Aggregate output (Y) is an increasing function of L.

If the other inputs, capital and technology, are held fixed then labor should exhibit diminishing returns.

Back 3

Labor (L)

Front 4

In some modern growth models, the notion of capital comes in two form

Back 4

1) the usual physical capital

2) human capital

Front 5

Almost anything that raises the amount of real GDP that can be produced with a given amount of labor and capital.

Back 5

Technological Progress (A)

Front 6

assuming that production exhibits constant returns to scale implies

Back 6

if you double your capital and labor inputs, then you will double your output.

Front 7

Growth Accounting Formula #1:

Back 7

(1) A 1%-increase in L will result in a 2/3%-increase in Y; a 1%-increase in K will result in a 1/3%-increase in Y; a 1%-increase in A will result in a 1% increase in Y;

Front 8

Growth Account Formula #2:

Back 8

(2) Increases in labor (L) are twice as important as increase in capital (K). However, if labor is the only factor growing, then living standards will fall (output would grow slower than labor input).

Front 9

Growth Account Formula #3:

Back 9

(3) Since we can directly measure real GDP(Y), labor (L), and capital (K), we can back out an estimate for the rate of technological progress (A).

Front 10

measures and tracks the productivity of individual inputs

Back 10

Labor Productivity: Y/L

Capital Productivity: Y/K

Front 11

highly correlated with living standards in free-market economies.

Back 11

labor productivity

Front 12

There is a theory that there will be an inverse relationship between the rate of growth and living standards (real GDP per capita).

Back 12

a) To put it another way, poor countries should grow faster than wealthy countries.

b) When applied to countries around the world, this theory is often referred to as ‘Global Convergence”.

c) Since poor countries would be growing faster than rich countries, they would be ‘catching-up’ to the rich countries. Hence living standards would be converging.

Front 13

two basic ideas behind global convergence:

Back 13

1) Technology and information are difficult to control and hence move rapidly across borders.

2) There are diminishing returns to capital investment.

Front 14

The effects of technology and information being difficult to control and rapidly moving across borders

Back 14

Advanced education has already become completely international.

The reverse engineering of products is also commonplace.

Hence, over the long-run, production technologies are going to be similar.

Front 15

The effects of diminishing returns to capital investm:

Back 15

-When capital is scarce, the addition of capital will have a bigger impact on productivity compared to when capital is plentiful

- Hence, when capital is scarce, the rates of return on capital investment will be high and the capital stock will grow rapidly.

- Likewise, when capital is plentiful, the rates of return on capital investment will be lower, and the capital stock will grow slowly.

-Relatively poor country = lower capital per worker = higher rate of return to capital investment = more capital investment = faster productivity growth.

Front 16

There is empirical evidence supporting global convergence both within the US as well as among the developed countries:

Back 16

The inverse relationship between the growth rate of income per capita and the absolute level of income per capita is strong among the US states.

NOTE: There is NOT much convergence among developing countries

Front 17

Several reasons for why we don’t see the global convergence among developing countries:

Back 17

1) Lack of economic freedom and private property rights

2) Political instability

3) Low Rates of Saving and Investment

4) Poor Public Education and Health