Lecture 3: Sources of Growth

NOTES
- Proximate: the immediate things such as capital, labour and human capital
- These are different to the underlying reasons of growth
- Quantifying the proximate sources of growth allows us to benchmark performance
- The methodology makes a lot of assumptions

NOTES
- We must aggregate factor inputs, and this is done by estimating a weighted average
- TFP = Total Factor Productivity
- It is the remaining source of growth
- It is also called the residual (Solow residual)
NOTES
- The Cobb-Douglas production function has constant returns to scale
- α also represents the level of efficiency in the economy

NOTES
- TFP reflects the efficiency of the allocation of resources
- We would assume that ∆α/α is positive, but in fact it is negatives in certain cases
- Negative in several African countries in the late 20th century
- But why lower output from factor inputs?
 Disruption such as civil war
 E.g. Germany after WW2 had a lower output from factor inputs due to
disruption
NOTES
- Capital deepening: this is linked to labour productivity growth by changes in α
- Crude TFP: when we are able to account for labour quality

NOTES:
- V: is the weighting share
- Labour quality grows as fast as the adjusted measure of labour input
 NOTES
- Y/HW Growth = labour productivity growth
- However, in the table above we are not really noticing the skills formation in the economy

NOTES
- Higher pressure steam requires strong boilers, so it does not boil
- Evidently, there was little knowledge of physics
- The UK did not make enough money in the innovation sector since it was more lucrative
being in the church
- The old era of corruption
NOTES
- This is a Millennial Macroeconomic Spreadsheet
- Labour quality becomes more important at the end of the 20th century and at the start of
the 21st century
- The general trend is that capital per labour input is falling
- However, TFP is high during the Golden Age

NOTES
- Endogenous growth theory: this theory states that economic growth is primarily the result
of endogenous and not external forces
- It stipulates that investment in human capital, innovation and knowledge are significant
contributors to economic growth
- 2nd Industrial Revolution: 1880 to WW2

NOTES
- Was this due to unqualified immigrants bringing down labour quality???
NOTES
- TFP is a proximate source of growth, a
diagnostic
- We can use the growth accounting to
estimate level in productivity
- Y/L = labour productivity
- Germany has a very large agricultural sector, hence the low TFP level