Measuring Productivity Economic Growth David Weil Chapter 7 Prepared by Ali Güneş, Zirve University

Productivity Gap How much productivity differs across countries? How much of the variation among countries’ income per capita is explained by the variations in productivity?

Production function: Y = AK α (hL) 1-α In per worker terms: y = Ak α h 1-α

k α h 1-α is the factors of production A is the measure of productivity Output: productivity*factors of production

Growth accounting y = Ak α h 1-α log(y) = log(A) + α log(k) + (1-α) log(h) log(A) = log(y) - α log(k) - (1-α) log(h)

Comparing two countries y 1 = A 1 k 1 α h 1 1-α y 2 = A 2 k 2 α h 2 1-α y 1 /y 2 = (A 1 /A 2 ) (k 1 α h 1 1-α /k 2 α h 2 1-α ) y 1 /y 2 = (A 1 /A 2 ) (k 1 /k 2 ) α (h 1 /h 2 ) 1-α

Some data… Country y kh k 1/3 h 2/3 A USA Japan Turkey Brazil India Kenya

Measurement Productivity is the part of differences in output that is left over when differences in factors of production are accounted for. There are many problems in measurement of physical capital. There are many problems in measurement of human capital.

Countries over Growth rate of factors of production Lowest growth: 0.41 Second-lowest : 0.82 Middle growth: 0.93 Second-highest: 1.12 Highest growth: 1.79

Countries over Growth rate of productivity Lowest growth: Second-lowest : Middle growth: Second-highest: 0.47 Highest growth: 1.25

Components of output A country can produce more output either by increasing the factors of production or by using its factors more effectively

Summary Productivity differs among countries quite a lot Growth accounting is the way we measure productivity