Download Growth accounting

POLITICAL ECONOMY OF GROWTH
SECS-P01, CFU 9
Finance and Development
academic year 2016-17
8. TECHONOGICAL PROGRESS
Roberto Pasca di Magliano
Fondazione Roma Sapienza-Cooperazione Internazionale
[email protected]
Introduction
• The technical progress in the Solow model, the exogenous cause
of the growth of per capita income steady state.
• Before explaining the causes of technical progress (growth
theories endogena), this raises the problem of its measurement.
• The 'approach' growth accounting 'is proposed to decompose the
growth rate of the economy in the contributions of the
accumulation of factors of production on the one hand and
technical progress on the other.
The Production Function
• The product of an 'economy is represented by:
Y  f ( K , L, t )
• The increase of production may 'be due to:
• Increase in the factors of production, capital (K) and labor (L).
• Technological change. The shape of the production function changes over
time (t).
The representation of
the output through isoquants
• The isoquants of the production function provide a geometric
representation of the production function are the pairs of K and L that
produce a given output Y.
The representation of
the output through isoquants
• The production increases for the following reasons:
• Increase of only one of the factors. But given the diminishing
returns of the single factor, that increase will stop.
• Increase of both factors:
• Constant returns, increasing or decreasing.
• The Solow model assumes constant returns to use the theory of
marginal distribution
• Technological improvement.
Taxonomy
Initial date technology with an infinite number of
production techniques (possible combinations of K and
L), technical progress is said:
- 'Labor augmenting', or Harrod neutral, if it increases the
productivity 'of the work of all production techniques
leaving the productivity' of capital unchanged.
(Hypothesis of the Solow model).
Yt  f ( K t , (1   )t Lt )
where γ and 'the growth rate of productivity' of work
- 'Factor augmenting' or Hicks neutral, if increases in
equal measure productivity 'of labor and capital of all
production techniques, leaving the ratio K / L
unchanged.
Yt  f ((1   )t Kt , (1   )t Lt )  f ((1   )t Kt , (1   )t Lt ) 
(1   )t f ( Kt , Lt )
Growth accounting
• Separates the effect of the accumulation of factors from that of
technical progress on the rate of growth of the economy
DY = fK DK + fL DL + ft , fx = df / dx
ft
Y
f K K K
f L L LK



Y
Y
K
Y
L
Y
• The growth rate of the economy and 'equal to the sum of the
growth rates of factors, each multiplied by the relative elasticity of
production, and a measure of technological change.
• Note that the elasticity of production are not directly observable,
but under the assumptions of the Solow model, same as the
percentage of national income of the factors.
• where χ and 'the growth rate of productivity' of capital
Growth accounting
TFP, or measure of technical progress, is measured as a residual:
ft
 gY  g K  (1   ) g L
Y
where π and 'the share of profits in national income, expressing growth
rates.
This method, first suggested by Solow (1957), is typically applied using the
Cobb-Douglas production and Hicks neutral technical process:
Y  AK  L1
where α turns out to be both the elasticity 'of production to capital, and the
share of profits in income.
Growth accounting –results• The first estimates for the United States for the first half
'of the century ('56 Abramovitz, Solow '57) show that TFP
is responsible for almost 90% of the growth of output per
capita.
• However, this result is' vitiated by errors of measurement
in the quality of the factors that tend to underestimate
their impact.
Growth accounting – insights –
1) Technical progress embodied in capital goods.
The new technologies, at least in part, are incorporated in the new
capital goods. Need 'to measure the stock of capital in units'
efficiency (τ):
t
 t   K i (1  k ) i
i 0
where λk and 'the rate of improvement of the quality' of capital
goods. The growth rate (τ) depends on: the growth of the stock of
physical capital, the rate of improvement of the quality 'of goods,
changes in the age' average stock of capital.
Growth accounting – insights –
2) Improvements in the quality 'of the work.
Each one unit 'of physical work can' increase its
efficiency by:
- Accumulation of human capital (eg education)
- job experience (learning by doing)
These two channels have become the starting point
of the analysis of endogenous growth
Growth accounting – insights –
3) structural change in the use of factors in favor of the
activities 'more' productive.
The aggregation of the factors K and L hides the
different productivity of the various capital goods quality
and heterogeneous work.
The contribution of a factor shifting resources from one
sector with low productivity to high productivity
increases (ex from 'agriculture industry).
Growth accounting
– developing countries vs developed –
Main trends (1960-94):
• The key role of accumulation of factors
• Important but limited compared to developed countries TFP
• Important role in the reallocation of resources between sectors.
interpretation:
The industrialized countries are more 'close steady state and have
to resort to technical progress in order to grow, on the contrary the
developing countries can use the initial benefits from capital
accumulation