1. 1 Production and Long-Term Growth

2. 2 Conceptualization This conceptualization is a way to organize your thinking to understand many complex interrelated economic events.

3. 3 How does output increase? Key to our analysis of growth will be the production function Can boost output by increasing factor inputs or using inputs more efficiently

4. 4 Aggregate Production Function Aggregate production function for the US: y = A k.3 n.7 –y = real output (income) –k = physical stock of capital –n = labor input per unit of time –A = level of efficiency or total factor productivity (TFP)

5. 5 Growth Accounting is Everywhere

6. 6 Calibrating the Aggregate Production Function The production function is motivated by this fact: Labor income share is consistently 70% of national income Capital income share is 30% of national income

7. 7 Labor Income Share of GDP Distribution of National Income, 1994 Employee Compensation as Percentage of GNP 1959-1999 (very stable over time at 70%)

8. 8 US Production Function: Measurement y, k, measured in billions of 1992 dollars. n measured in millions of workers. A is computed by using the production function

9. 9 Growth Accounting and Efficiency of the Economy Growth-accounting equation: The labor contribution to growth: 0.7 * % growth of labor Capital contribution to growth: 0.3 * % growth in capital

10. 10 Growth during 1950-73: TFP has been important labor input also important for US and Japan. Examples of Growth Accounting

11. 11 Growth slowed down dramatically during 1973-92 Examples of Growth Accounting

12. 12 Understanding efficiency Higher A implies that the economy is more efficient More output can be produced with the same inputs (labor and capital)

13. 13 Innovation and TFP Growth

14. 14 Learning by doing and TFP growth In New Economy same effect is achieved by using computers and other IT --- this also raises y/n.

15. 15 What determines TFP?

16. 16 Relationship between Income and Growth

17. 17 Open Countries Tend to Converge Open: (1) effective protection rates < 40%, (2) quotas on < 40% of imports, (3) no currency controls or currency black markets, (4) no export marketing board, and (5) not socialist.

18. 18 Technology Adoption Rates Differ Dramatically Across Countries

19. 19 The Speed of Technology Adoption is Rising Over Time Percent of U.S. Households Year

20. 20 Productivity growth rates in the US Where is the US productivity growth coming from since the mid 90s?

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22. 22

23. 23 Recent Productivity in the US

24. 24 Why Care About TFP? Sustained Growth not possible without TFP growth Incentive to invest related to return to capital---this falls rapidly to zero without TFP growth Without TFP growth income will stop growing

25. 25 Soviet Union had no TFP growth—return to capital fell to zero

26. 26 International Differences in Labor Productivity

27. 27 Output per worker Labor productivity is output per worker Living standard is determined by A: efficiency (or TFP) k/n: capital per worker

28. 28

29. 29 International Differences in Output per Worker Residual TFP x Education = TFP

30. 30 International Differences Output Per Worker is higher in economies with –Higher Education –Higher Residual TFP (other than education) –More Physical Capital Economies with higher TFP = Residual TFP x Education also have more capital

31. 31 Convergence of Economies

32. 32 Does TFP growth explain convergence?

33. 33 TFP relative to the US

34. 34 Growth from 1,000,000 BC to now Pre-Industrial Revolution stagnation in per-capita income Industrial Revolution and TFP Growing Income Inequality 21 st Century may be the Century of Convergence