1. Chapter 3
Economic
Growth:
Concepts and
Patterns

2. Divergent Patterns of Economic growth
GDP per capita (1996 PPP)
Y2003
Y1960
Average Annual growth rate
Income as a share of US Income
1960
2003
Senegal
1818
1557
0.86
=86%
-0.22
0.15
0.04
Botswana
958
8232
8.59
=859%
5.33
0.08
0.22

3. Factor Accumulation, Productivity Growth, and Economic Growth
Availability
Productive Use
Productivity Growth
Efficiency
Technological change
Leads to major shifts in the composition of output

4. Factor accumulation

5. Productivity Growth

6. Saving, Investment, and Capital Accumulation
New Investment increases the capital stock
The value of new investment must be larger than the amount of depreciation of existing capital.
“Capital” can be physical capital, human capital, etc., that is, it can be machines, education, hospitals, etc.

7. Saving, Investment, and Capital Accumulation
Investment is financed by saving
To produce goods that will produce other goods, we have to give up consumption (i.e., save) today.
E.g., education involves staying out of the labor market for a while.

8. Saving, Investment, and Capital Accumulation
Saving comes from current income
Household saving
Corporate retained earnings
Government surplus

9. Saving, Investment, and Capital Accumulation
Investment is uncertain: Investments in education only pay off if
Complementary inputs exist
You are allowed by the government to practice
Your income is not taken by thugs
Your skills remain useful throughout your life.

10. Saving, Investment, and Capital Accumulation
Sustaining economic growth requires both generating new investment and ensuring the investment is productive.

11. Growth Accounting 80-90 90-95 95-00 00-04 gY 3.3% 2.5% 4.2% 2.4% gL
United States
Basic data for growth accounting
80-90
90-95
95-00
00-04 gY
3.3%
2.5%
4.2%
2.4% gL
1.7%
1.3%
1.9%
-0.4% gK
4.9%
3.5%
5.8%
3.2% WK
0.29
0.30 a
0.6%
0.5%
1.1%

12. Growth Accounting
a is the measure of Total Factor Productivity … and of our ignorance
TFP plays less of a role than factor accumulation in developing countries (compared to industrial countries)

13. Characteristics of rapidly developing countries
Based on cross-country regressions: what are the determinants that makes countries growth differently?
We don’t know exactly how these factors contribute to growth
We don’t know which causes which.

15. Macroeconomic and political stability
Make investment more predictable
Protect the poor

17. Better health and education make workers more productive:
They make businesses more likely to invest
They make people more likely to save for the future

18. Better governance and rule of law, better bureaucracies and property rights, more effective and less burdensome regulation, less corruption:
They make businesses more likely to invest
They make people more likely to save for the future

23. Diminishing returns and the production function
Diminishing marginal product of capital
Productivity gains typically do not have diminishing returns

25. Diminishing returns and the production function
Diminishing returns means that, ceteris paribus, new investment in a poor country will have a much larger impact on output than the same investment in a rich country.
This means:

26. Diminishing returns and the production function
Ceteris paribus, poor countries have much larger growth potential.
Ceteris paribus, growth will slow as a country gets richer
Ceteris paribus, poor and rich countries will converge.

27. Diminishing returns and the production function
What is the ceteris that we are assuming to be paribus?
Same production function
Same technology
Same saving rate
If so, then growth is derived primarily from factor accumulation and not productivity growth

28. Ceteris paribus

29. Ceteris not paribus

30. Divergence?

31. Convergence in the OECD?

32. Convergence in countries with similar policies?

33. Structural Change How does the composition of output change?
Engel’s Law
Share of Y produced by agriculture declines, industry and services get a bigger share.
Share of Population in agriculture declines (but not as rapidly as the share of Ag in Y), industry and services get a bigger share.

34. Patterns of Development, 1950-1970, with Moises. Syrquin, 1975.

37. Structural Change How does the composition of output change?
Population becomes urbanized
Why? Economies of scale; common resources for industrial production.
Larger share is sold through markets rather than produced for own consumption

39. Structural Change
Expansion of agricultural productivity is key to reducing the share of workers in agriculture.