Pablo-Zachary Minguez Lumsden

1007905769
ECO202Y 23/24
Wri-ng Assignment 1

Evalua'ng TFP Growth Models

In this essay I will be looking at a blog post by Dietrich Vollrath that comments on the

working paper ‘Addi-ve Growth’ by Thomas Phillipon. Vollrath presents arguments for and

against the use of addi-ve growth to model Total Factor Produc-vity (TFP)1. I will analyze

their proposi-ons and present a conclusion on the suitability of addi-ve growth for further

modelling of TFP.

Phillipon’s main result is that addi-ve growth more adequately describes TFP than

exponen-al growth. Addi-ve and exponen-al growth differ in the rate at which they grow.

Addi-ve growth experiences a constant rate of growth in every consecu-ve period.

Exponen-al growth experiences an increasing rate of growth in every consecu-ve period. If

TFP growth is addi-ve, then the output of an economy is propor-onal to TFP. On the other

hand, exponen-al TFP growth means that in every consecu-ve period TFP is responsible for

a larger share of output.

Next, Vollrath replicates Phillipon’s work but uses GDP per capita instead of GDP per

worker/ hour. Similar to Phillipon, Vollrath graphs Year versus GDP per capita. For the years

between 1950 and 2000, the exponen-al curve models GDP per capita becer. The addi-ve

growth curve does becer ader 2010.

1
Total Factor Produc-vity measures how efficient countries are at using their factor inputs to
create total output (GDP).
2
Diminishing returns: The addi-on of an input (idea) to a process (TFP crea-on) contributes
less output (TFP) than the previous input added did.
3
Human Capital: The stock of knowledge and skills that make people more produc-ve
members of society.
 According to Vollrath, the reason for this result is demographics. GDP per capita is

dependent on popula-on dynamics. Vollrath finds that GDP per capita growth exhibited

exponen-al growth due to baby boomers joining the workforce. The exponen-al and

addi-ve curves greatly deviate ader 1980, which coincides with the bulk of baby boomers

entering the workforce between 1962 and 1980. This is why we see the GDP per capita

curve keep up with the exponen-al curve ader 1980. Ader 2000, the ra-o of workers to

popula-on falls as baby boomers gradually led the work force. Thus, the GDP per capita

curve falls out of sync with the exponen-al growth curve.

Vollrath offers an alterna-ve view to Phillipon’s because he selects a different

measure of GDP. GDP per capita over emphasized the impact of baby boomers, showing us

that growth was exponen-al for around 50 years. As such, Phillipon’s use of GDP per worker

in his work offers a limited view (or one that is over reliant on certain factors) on whether an

economy’s growth is truly addi-ve.

Next, Vollrath looks into Phillipon’s comments on Ideas and TFP. Phillipon proposes

that assuming strict propor-onality between TFP and ideas is incorrect. I will explain this

assump-on. First, ideas are produced with research. New ideas are added to an exis-ng

bank of ideas. This implies that with every new idea added to the bank, the percentage

change of new ideas falls. As such, the growth rate of ideas eventually becomes constant

1
Total Factor Produc-vity measures how efficient countries are at using their factor inputs to
create total output (GDP).
2
Diminishing returns: The addi-on of an input (idea) to a process (TFP crea-on) contributes
less output (TFP) than the previous input added did.
3
Human Capital: The stock of knowledge and skills that make people more produc-ve
members of society.
and is propor-onal to the research growth rate. If we assume that the growth rate of

research is exponen-al, then TFP growth is exponen-al.

Instead of the propor-onality assump-on, Phillipon proposes that new ideas lead to

diminishing returns2 in TFP. Since new ideas interact with exis-ng ideas, which are already

responsible for TFP growth, the addi-onal increase to TFP from a new idea is likely small.

Therefore, in the long run, Phillipon suggests that each addi-onal new idea will contribute

less to output than the previous. Thus, the strict propor-onality between ideas and TFP is

overly op-mis-c. Consequently, Vollrath theorizes that ideas follow logarithmic growth

(describes diminishing returns becer). Vollrath shows this mathema-cally. The logarithmic

rela-onship between TFP and Ideas (TFP = ln(Ideas)) would demonstrate diminishing returns

to ideas and addi-ve growth in TFP. Ul-mately, Vollrath agrees with Phillipon on his view of

ideas and TFP. Vollrath adopts this view because mathema-cal work backs it. New ideas and

addi-ve TFP growth do not model accurately with the strict propor-onality assump-on.

Now I will consider whether the addi-ve growth model is suitable to project TFP into

the future. The Fernald data showed us that the addi-ve growth model was more accurate

than the exponen-al model in reproducing TFP from 1948 to 2019. This means that TFP is

likely to plateau due to more conserva-ve growth. However, Vollrath dissuades us from

immediately accep-ng that TFP exhibits addi-ve growth (or exponen-al growth) as related

measures of growth like GDP per capita and Ideas differ with respect to which growth rate

1
Total Factor Produc-vity measures how efficient countries are at using their factor inputs to
create total output (GDP).
2
Diminishing returns: The addi-on of an input (idea) to a process (TFP crea-on) contributes
less output (TFP) than the previous input added did.
3
Human Capital: The stock of knowledge and skills that make people more produc-ve
members of society.
approximates them becer. Therefore, one must consider a holis-c understanding of output

and TFP.

Firstly, there is varia-on in the development level of na-ons. For example, lesser

developed na-ons do not always grow faster than richer na-ons. This phenomenon

describes TFP. As such, the global growth of TFP in any direc-on is unclear. There are

arguments for and against posi-ve or nega-ve TFP growth. We could consider the impact of

technology like AI, or the improving quality of human capital3 across na-ons, as posi-ve

growth. Alterna-vely, we may consider the governments and ins-tu-ons of certain na-ons

as a nega-ve contributor to TFP. The possibility of global shocks, like the baby boom or

COVID19, could trigger devia-ons in TFP growth. Phillipon considered the work force and

Vollrath considered demographics, which yielded differing results. It seems that sugges-ng

that TFP will follow any specific growth rate with certainty is merely specula-ve. Therefore, I

don’t think that the addi-ve growth model is suitable for predic-ng TFP over the next

twenty years due to the plethora of vola-le exogenous variables involved in determining TFP.

(880 words)

Bibliography

Philippon, Thomas. “Additive Growth.” National Bureau of Economic Research, April 2022.
https://doi.org/10.3386/w29950.

Vollrath, Dietrich. “Implications of Additive Growth.” Dietrich Vollrath, August 9, 2022.

https://growthecon.com/feed/2022/08/09/Additive.html.

1
Total Factor Produc-vity measures how efficient countries are at using their factor inputs to
create total output (GDP).
2
Diminishing returns: The addi-on of an input (idea) to a process (TFP crea-on) contributes
less output (TFP) than the previous input added did.
3
Human Capital: The stock of knowledge and skills that make people more produc-ve
members of society.