Development and Growth Accounting

ECON 164: Theory of Economic Growth
Development and Growth Accounting
Pablo Fajgelbaum
UCLA
May 13, 2015
Fajgelbaum (UCLA)
May 13, 2015
1 / 18
The Role of Productivity in Growth
These slides complement Chapter 7 of Weils textbook.

Our production function is:
y = AF (k, h )
We call A the level of productivity, or "total factor productivity" (TFP)
We saw that k (and factors that determine k, like s) and h partly

explain dierences in y
How much does productivity A dier among countries? How much of
dierences in income per capita and growth is explained by A?
Because A is not observed, its sometimes referred to as "Solow
residual" (also called a "measure of our ignorance")
Fajgelbaum (UCLA)
May 13, 2015
2 / 18
Sources of Dierences in Income per Worker with

Productivity Variation
Fajgelbaum (UCLA)
May 13, 2015
3 / 18
Measuring Productivity Dierences across Countries
The world looks more like the 3rd panel, so we must use a production
function to infer dierences in A
Fajgelbaum (UCLA)
May 13, 2015
4 / 18
Measuring Productivity Dierences Across Countries

We start from output in country i
Yi = Ai Ki (hi Li )1
Fajgelbaum (UCLA)
May 13, 2015
5 / 18

Then output per worker in country i is:

yi = Ai ki hi1
| {z }
factors
Fajgelbaum (UCLA)
May 13, 2015
5 / 18


yi = Ai ki hi1
| {z }
factors
Output of country 1 relative to country 2:

y1
A1 k1 h11
=
y2
A2 k2 h21
Fajgelbaum (UCLA)
May 13, 2015
5 / 18


yi = Ai ki hi1
| {z }
factors

y1
A1 k1 h11
=
y2
A2 k2 h21
We can solve for (unobserved) productivity ratios as function of

(observed) dierences in income and factors:
A1
y1 k2 h21
=
A2
y2 k1 h11
Fajgelbaum (UCLA)
May 13, 2015
5 / 18


yi = Ai ki hi1
| {z }
factors

y1
A1 k1 h11
=
y2
A2 k2 h21
We can solve for (unobserved) productivity ratios as function of

(observed) dierences in income and factors:
A1
y1 k2 h21
=
A2
y2 k1 h11
This exercise is called Development Accounting

Fajgelbaum (UCLA)
May 13, 2015
5 / 18
Development Accounting
Fajgelbaum (UCLA)
May 13, 2015
6 / 18
Factors of Production Relative to the US by group of

Income
Fajgelbaum (UCLA)
May 13, 2015
7 / 18
Productivity Relative to the US by group of Income
Fajgelbaum (UCLA)
May 13, 2015
8 / 18
Importance of Productivity and Factor Accumulation?
Both productivity and factor accumulation appear to be important

Accumulated factors range from 19% (poorest countries) to 94%
(richest countries)
Productivity factors range from 15% (poorest countries) to 94%
(richest countries)
Productivity appears to be slightly more important to explain the low

relative incomes of poorest countries
Can we obtain a precise measure?
Fajgelbaum (UCLA)
May 13, 2015
9 / 18
Importance of Productivity and Factor Accumulation

Let
ry ,i
rA,i
rf ,i
= yi /yUS
= Ai /AUS
1
= ki hi1 /kUS
hUS
Then
ry ,i = rA,i rf ,i
in logs
ln ry ,i = ln rA,i + ln rf ,i
Implies
var [ln ry ,i ] = var [ln rA,i ] + var [ln rf ,i ] + 2cov [ln rf ,i , ln rA,i ]
Fajgelbaum (UCLA)
May 13, 2015
10 / 18
Importance of Productivity and Factor Accumulation

We can measure each of these in the data:
var [ln ry ,i ] = var [ln rA,i ] + var [ln rf ,i ] + 2cov [ln rf ,i , ln rA,i ]
|
{z
}
| {z } | {z } | {z }
1.64
0.49
0.38
0.39
Finally, we compute the role of our residual measure of productivity:

Productivity explains:
Factors explain:
var [ln rA,i ] + cov [ln rf ,i , ln rA,i ]

= 53%
var [ln ry ,i ]
var [ln rK ,i ] + cov [ln rf ,i , ln rA,i ]
= 47%
var [ln ry ,i ]
So, observable dierences in factors explain about half (47%) of

variation in income
Fajgelbaum (UCLA)
May 13, 2015
11 / 18
Growth Accounting
The exercise before consisted in explaining variations in levels.

What about variation in growth rates? > Growth Accounting
Fajgelbaum (UCLA)
May 13, 2015
12 / 18
The Role of Factor Accumulation in Growth, 1975-2009
Ranges from 0.43% to 1.83%
Fajgelbaum (UCLA)
May 13, 2015
13 / 18
The Role of Productivity in Determining Growth,

1975-2009
Ranges from -1.42% to 1.33%

Fajgelbaum (UCLA)
May 13, 2015
14 / 18
Growth Accounting
Can we obtain a concrete measure of how important is factor
accumulation for growth dierences?
Start in general from
y = AF (k, h )
Take total derivative with respect to all factors of production and
productivity
dy = F (k, h ) dA + AFk (k, h ) dk + AFh (k, h ) dh
Divide both sides by Y
dy
F (k, h )
AFk (k, h )
AFh (k, h )
dA +
dk +
dh
=
y
AF (k, h )
AF (k, h )
AF (k, h )
to reach
gy = gA +
Fajgelbaum (UCLA)
AFk (k, h ) k
AF (k, h )
dk
+
k
AFh (k, h ) h
AF (k, h )
dh
h
May 13, 2015
15 / 18
Growth Accounting (Contd)

Therefore we get
gy = gA + gk + (1
) gh
Over time within a country, how important is productivity? I.e.,

compute ggAy
US: gA1970 2005 = 0.66% and gy1970 2005 = 1.57% from 1970-2005, so
g A1970
g y1970
2005
2005
= 42%
Across countries between 2 periods of time, how important is

productivity? I.e., compute
var [gA (i )] + cov [gA (i ) , gk (i ) + (1
var [gy (i )]
Fajgelbaum (UCLA)
) gh (i )]
= 68%
May 13, 2015
16 / 18
Measurement Issues
Measurement of human capital
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
Not only years of education but also quality (much harder to measure)
matters
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters
Human capital is accumulated in forms other than schooling
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters
Measurement of physical capital
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters

Separating between investment and consumption in total expenditures
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters

Government spending
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters

Government spending
Measurement of number of workers
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters

Government spending

Informal sector
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters

Government spending

Informal sector
Home production
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Measurement Issues
matters

Government spending

Informal sector
Home production
What do these issues imply for the gaps in our measured productivity
and income across poor and rich countries?
Fajgelbaum (UCLA)
May 13, 2015
17 / 18
Where next?
Our analysis suggests that focusing on A in the production function is

important (at least as important as K , L)
We will incorporate changes in A to the Solow model to study
long-run behavior of the economy
"Endogenous growth"
Fajgelbaum (UCLA)
May 13, 2015
18 / 18

Development and Growth Accounting

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Development and Growth Accounting

Transféré par

Droits d'auteur :

Formats disponibles

ECON 164: Theory of Economic Growth