Transcript Lecture 3 - Key Facts about Economic Growth

L11200 Introduction to Macroeconomics 2009/10
Lecture 3:
Key Facts About Economic Growth
Reading: Barro Ch.3 : p36-52
28 January 2010
Introduction
• So far: introduction and measurement
– Two main topics: growth and fluctuations
– Key macroeconomic variables and their
measurement
• This Time: begin first topic: economic growth
– More empirical evidence on cross-county growth
– Basics of the growth model
Economic Growth
• Begin today with some evidence on economic
growth. Key questions:
– Why are some economics more ‘developed’ than
others?
– Why do GDP growth rates vary across nations?
– What is the relationship between the level of GDP
and the growth rate of GDP?
Summary
• Wide variation in real GDP per person
– small group of nations with very high real GDP
• Over last 40 years some ‘winners’ and ‘losers’
– Winners: China, S. Korea, Taiwan
– Losers: Congo, Niger, Angola
• Higher-GDP nations don’t show fastest growth
– Middle-GDP nations tend to grow fastest
– Some perpetually poor / low growth nations
Poverty and Inequality
• Distribution of world income is very unequal
– Nearly all U.S. population have standard of living
above that of nearly all Chinese population
• One way to measure poverty is by some
common benchmark: $1 per day
– By this measure poverty has fallen greatly over
last 30 years
– Majority of India, China lifted out of poverty,
majority of Nigeria still in poverty
Basics of a growth model
• In microeconomics we model output as a
function of inputs: capital (K) and labour (L)
• Add ‘technology’, denoted by ‘A’, in this form:
Y  A  F ( K , L)
• Functional form F ( K , L) is critical here
– It determines the marginal products of the inputs
– Plus the returns to scale of the inputs
Basics of the growth model
• For capital and labour assume diminishing
marginal product plus constant returns to
scale
– If we double capital and labour, output doubles
– If we increase capital independent of labour, each
marginal increase gives less addition to output
• For technology: assume technology is a level
parameter: if A doubles, output doubles
Functional Form
• Cobb-Douglas function has these properties
 1
Y  A  F (K L )
– Where α is the capital share in production
– Simple concept: how important is capital, relative
to labour, in making the output
– If α=1 then only capital matters in production
– Idea: if I increase K by 1 unit, the effect on Y
depends on how important K is in production
 1
Y  A  F (K L )
• So output growth is given by:
Y / Y  A / A    (K / K )  (1   )  (L / L)
• ‘rate of growth of output depends on the rate
of growth of technology, plus the rate of
growth of capital and labour weighted by their
shares in production’
• Initially assume A / A  0
Y / Y    (K / K )  (1   )  (L / L)
GDP per worker
• Interested in GDP per worker, y  Y / L
y / y  Y / Y  L / L
growth rate of GDP per worker = growth rate of real GDP – growth rate of labour
k / k  K / K  L / L
growth rate of capital per worker = growth rate of capital – growth rate of labour
• i.e. if Y is growing at 5%, but L is growing at
5%, then the growth is Y/L is zero.
Growth in GDP per worker
• Output growth is given by:
Y / Y    (K / K )  (1   )  (L / L)
Y / Y    (K / K )  (L / L)    (L / L)
Y / Y  L / L    (K / K  L / L)
Growth rate of GDP per worker
Growth rate of capital per worker
• So, this equation is simply:
y / y    (k / k )
y / y    (k / k )
• To get per capita output growth, you need to
increase capital per worker
– This makes each worker more productive, so
increases output per worker
– Doubling number of machines and workers
doesn’t change output per work (because of CRS)
– Adding just workers lowers k and so causes output
per worker to fall
• Key result: GDP per worker can only be
increased by adding more capital input
Summary
• Levels / growth of per capita GDP vary greatly
across nations
• In general, levels of poverty have improved
over last 30 years
• We began a basic model of GDP
• Key insight: GDP per worker can only be
increased by adding capital to production (in a
world without technology growth)