Lecture X4 Economic growth.pptVIP

* Lecture 4 Economic growth Outline A Cobb-Douglas production function will be used to study how much (1) capital, (2) labor and (3) total factor productivity have contributed to China’s economic growth. Use of a set of equations to forecast economic growth. Use of simple projections of growth of GDP in PPP to predict when China’s GDP will exceed that of the US. * * Saving and economic growth in China 1. The rate of growth of real GDP had been about 9.3 percent per year from 1978 to 1998, and higher since. 2. The rate of saving or capital formation has been high, over 30 percent of GDP and even over 40 percent in more recent years. Saving is needed to achieve growth in income for one person and for an entire economy. Asians save more, as individuals and as nations. Why the Chinese consumers saved an even higher portions of their income in recent years is an interesting question for research. How much has this high rate of savings contributed to China’s economic growth? Answer from this lecture: about 5.4 percent per year out of the 9.3 percent total. How to calculate this result? * The Cobb-Douglas production function Y = GDP, K= capital, L = labor all measured in physical units. Y in constant prices. K in constant prices. L in number of laborers. Difficult to find capital stock data; K estimated in Chow (1993, QJE). Read pp. 96-8 on how data were obtained. lnY = a + α t + β lnK + γ lnL + ε ε random residual β is elasticity of output with respect to capital, i.e. percentage change in Y due to one percent change in K; γ is elasticity of output with respect to labor; a + α t is the natural log of total factor productivity. Total factor productivity increases if α 0. Constant returns to scale if β + γ = 1. Y = AeαtKβ Lγ. When β + γ = 1, if both K and L double, output Y will double. In(de)creasing returns to scale if β + γ () 1. * * Regression analysis to estimate the intercept a and the coefficients α,β, and γ Section 5.3 is an elementary exposition of t