MEASURINGPRODUCTIONANDINCOME,Chapter2.docVIP

GROWTH ACCOUNTING, Lecture: JOAKIM PERSSON, 2011 I should use derivatives to come up with the growth accounting question, Instead of the approximate formulas below. Mathematics: Proportional or percentage Changes in Economics. Expressing levels into growth rates: Rule 1. If y(t) = x(t)*z(t), then . Ex.: Total Revenue (TR) = Price(P)*Quantity(Q) ( If P is raised by 10 % and sold quantity (Q) thereby decreases by 5%, then TR increases by 5 %. Rule 2. If y(t) = x(t)/z(t), then . Ex.: GNP per capita (y) = GNP(Y)/Population(Pop) ( If GNP (Y) increases by 5 % and the population increases by 3 % , then GNP per capita increases by 2 %. Rule 3. If , then . Rule 4. If , then thus the growth rate of Y equals: The growth rate of totalfactorproductivity. The contribution of physical capital. The contribution of labor. Question addressed by so-called growth accounting growth accounting: How big share of the growth rate of the GDP can be attributed to changes in capital, to changes in the labor input and to changes in total factor productivity? For developed countries we have good data on and , We have not direct data on as A captures the influence on Y of many different factors on Y. E.g. taxes, climate for business, educational level of work force, infrastructure, social capital etc. Under perfect competion, , is the share of national income that is capital income, and (1-) is the share of national income that is labor income. We have data on labor income and national income. Thereby, we get an estimate of . Example: Year Y A K L 2005 100 ? 300 1000 2006 103 ? 306 1010 and 0.03 = + 0.3*0.02 + 0.7*0.01 = 0.03 – 0.006 – 0.007 = 0.017. 0.017/0.03 = 0.57 : 57 percent of the growth rate of Y can be attributed to an increase in A. 0.006/0.03 = 0.2: 20 percent can be attributed to an increase in K. 0.007/0.03 = 0.23: 23 procent can be attributed to an increase in L. We have not explained why K, L and A changes over time. We have only been enga