Measuring production factor contributions to growth: A novel expenditure-based sectoral PPP approach Saša Drezgić

Clear objective, step forward Trace output growth sector by sector to three main factors of production Real capital Raw labor Human capital … by converting nominal to real values sector by sector using a different PPP conversion factor for each sector reflecting relative price changes In principle, clear advantage over current practice Tracing aggregate output growth to factors of production without PPP adjustment, or Tracing sectoral output growth to factors of production using the same PPP conversion factor for all sectors But where is efficiency? – trade, institutions, etc.

Measuring human capital Total hours worked by high-skilled persons engaged Differences in hours reflect several factors, including social security, tradition, etc. Other possibility: Mincer equation u = years of schooling v = 0.1, so each year of schooling increases H/L by 10% Can measure u by school life expectancy as reported by UNESCO SLE varies significantly across countries

Value added It would be helpful if the value added in the new approach could be demonstrated E.g., by showing that it reduces the Solow residual (“measure of our ignorance”) E.g., by comparing the disaggregated sources-of- growth analysis with the results of similar growth analysis based on aggregate output I.e., it would be helpful to demonstrate the quantitative benefits of disaggregation E.g., perhaps disaggregation systematically affects our measures of the relative contributions to growth by individual factors For starters, why not compare traded and non- traded output? – e.g., contribution of education

Value added Need more room for explicit consideration of efficiency – e.g., as a residual Openness Governance EU perspective Other work suggests that efficiency may be more important for growth than investment Hence, main question could be rephrased as Does proper accounting for sector-by-sector PPP conversion alter our views on the contributions of investment, education, and efficiency to economic growth?

Marina Tkalec Maruška Vizek SHOULD THE CNB DEVALUATE THE EXCHANGE RATE? EVIDENCE FROM PURCHASING POWER PARITY Marina Tkalec Maruška Vizek

Law of one price in context Deviations from PPP are only one of several indicators of currency misalignments Other indicators of overvaluation include Persistent and large current account deficits Escalation of external debt High inflation Low reserves In violation of the Giudotti-Greenspan rule

Croatia: External debt 1994-2007 (% of gni)

Croatia: Current account balance 1993-2008 (% of gni)