Economic Growth

Topics: Economic growth, Capital accumulation, Investment Pages: 62 (4152 words) Published: April 28, 2015
FIN 30220:
Macroeconomic
Analysis
Long Run Growth

The World Economy







Total GDP (2013): $87T
Population (2013):7.1B
GDP per Capita (2013): $13,100
Population Growth (2013): 1.0%
GDP Growth (2013): 2.9%

GDP per capita is probably the best measure of a country’s overall well being

Note. However, that growth rates vary significantly across countries/regions. Do you see a pattern here?

Region

GDP

% of
World
GDP

GDP Per
Capita

Real GDP
Growth

United States

$17T

20%

$53,000

1.6%

European Union

$16T

18%

$35,000

0.1%

Japan

$4.7T

5%

$36,300

2.0%

China

$13T

15%

$9,800

7.7%

Ghana

$90B

.1%

$3,500

7.9%

Ethiopia

$118.2B

.13%

$1,300

7.0%

Source: CIA World Factbook (2013 Estimates)

Per Capita Income

At the current trends, the standard of living in China will surpass that of the US in 25 years! Or, will they?

That is, can China maintain it’s current growth rate?

As a general rule, low income (developing) countries tend to have higher average rates of growth than do high income countries

Income

GDP/Capita

GDP Growth

Low

< $1,045

6.3%

Middle

$1,045 - $12,746

4.8%

High

>$12,746

3.2%

The implication here is that eventually, poorer countries should eventually “catch up” to wealthier countries in terms of per capita income – a concept known as “convergence”

Source: World Bank (2013 estimates)

Some countries, however, don’t fit the normal pattern of development

Sudan
GDP: $80B (#80)
GDP Per Capita: $2,400 (#184)
GDP Growth: -11.2% (#219)

Qatar
GDP: $150B (#59)
GDP Per Capita: $179,000 (#1)
GDP Growth: 16.3% (#1)

At current trends, Per capita income in Qatar will quadruple to $716,000 over the next decade. Over the same time period, per capita GDP in Sudan will drop by roughly 40%to $670!!!
So, what is Sudan doing wrong? (Or, what is Qatar doing right?)

To understand this, let’s look at the sources of economic growth….where does production come from?
“is a function of”

Real GDP

Y F  A, K , L 
Productivity Capital
Stock

Labor

Real GDP = Constant Dollar (Inflation adjusted) value of all goods and services produced in the United States
Capital Stock = Constant dollar value of private, non-residential fixed assets Labor = Private Sector Employment
Productivity = Production unaccounted for by capital or labor

A convenient functional form for growth accounting is the Cobb-Douglas production function. It takes the form:





Y  AK L

where

   1

With the Cobb-Douglas production function, the parameters have clear interpretations:





Capital’s share of income (what %
of total income in the US accrues to
owners of capital)

Labor’s share of income (what % of
total income in the US accrues to
owners of labor)

Elasticity of output with respect to
capital (% increase in output
resulting from a 1% increase in
capital)

Elasticity of output with respect to
labor (% increase in output resulting
from a 1% increase in labor)

Suppose we have the following Cobb-Douglas production function: A 1% rise in capital
raises GDP by 1/3%

A 1% rise in
employment raises
GDP by 2/3%

1
3

2
3

Y  AK L

We can rewrite the production function in terms of growth rates to decompose GDP growth into growth of factors:

1
2
%Y  %A   %K    %L 
3
3

Real GDP Growth
(observable)

Productivity Growth
(unobservable)

Capital Growth
(observable)

Employment
Growth
(observable)

Year

Real GDP (Billions of
2000 dollars)

Real Capital Stock
(Billions of 2000 dollars)

Employment (thousands)

1939

1,142

1,440

29,923

2006

11,257

12,632

135,155

2007

11,467

12,883

137,180

Lets decompose some recent data first…

%Y  ln 11,467   ln 11,257   *100 1.85 % K  ln 12,883  ln 12,632   *100...
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