Class 05

Econ 274 Class 05 of September 21, 2015

Growth

= the bottom line:

– we can use the Solow model to organize our thinking about factors central to growth

→ focus on capital accumulation, population growth and technical change

» an extension for our next class: two sectors instead of one

– capital accumulation faces diminishing returns (ditto better education)

→ in a dynamic context [cf. a spreadsheet, not done in class] growth peters out in less than a working lifetime of 40 years [see graph at bottom]

– indeed, in the long run all that matters is TFP growth

→ so would we expect China’s TFP growth to be low? high?

= details

– see the handout: Cobb-Douglas, diminishing returns and all that [see basic graph below]

– so gY/L = gTFP + α (gK – gL): higher TFP growth and Kapital accumulation boost the rise of per capita output, while population growth substracts from it.

» if you have values for TFP, s, δ, and n pop growth you can use sY = δK at equilibrium to calculate an explicit relation.

= measuring things:

– do a sample survey of businesses (and agriculture) for their capital stock. ask about age, purchase price, replacement cost and so on. not easy, but with a fairly modest budget and trained enumerators you can get an estimate.

– use the “perpetual inventory method” to do a quick estimate: count up new investment, which statistical agencies track (part of GDP calculations) and subtract off one year’s depreciation on the amount invested last year, two year’s depreciation for the previous year, and so on.

» I didn’t use this jargon in class

→ if δ is 12% then only half of the capital stock is left after 6 years, only a quarter after 12 years – and since the total amount of investment rises as China’s economy has growth, the weight of old investment in the total capital stock is even smaller

→ in other words, most stuff in China is pretty new! – and hence this crude estimate of the capital stock is pretty good, especially as you can disaggregate a bit because GDP statistics track residential investment, business structures, business equipment, car purchases and so on.

= reminder:

– it’s obvious but this is a “model” that deliberately simplifies things. once we have the core model we can go back and tweak it, as Edward Denison began doing in ? 1958, Dale Jorgenson about the same time

SolowDimReturnsSolowTimeProfile