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Macroeconomic Themes:22 1
Why Growth Rates Differs Across Countries?
Human Capital and Labour Market Reasons
Physical Capital and Financial Sector Factors
Fiscal and Monetary Policy Arrangements
Technology and Innovations and Adoptions
Trade and Exchange Rate Policies
Macroeconomic Themes:22 2
Growth Rates in the UK Economy
-6
-4
-2
0
2
4
6
8
10
12
Macroeconomic Themes:22 3
Growth Rates of Per Capita GDP (WDI 2000)
-4.000
-2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Years
Gro
wth
Ra
tes in
Pe
rce
nt
UK
USA
France
Germany
Italy
Japan
Macroeconomic Themes:22 4
Annual Growth Rates of GDP (WDI 2000)
-4.000
-2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000 UK
USA
France
Germany
Italy
Japan
Macroeconomic Themes:22 5
Growth Rates of GDP
-4.000
-2.000
0.000
2.000
4.000
6.000
8.000
UK
USA
France
Macroeconomic Themes:22 6
HLAKY and assume that 1 . Like before take log of this
production function and differentiate both sides w ith respect to time to get.
hg
ng
kg
ag
yg
y
y
Recall the fact that in steady state output and capital grow at the rate ofpopulation growth rate. A constant output per capita and capital per capita
in the steady state implies that L
Yy , or 0
L
dL
Y
dY
y
dy
Human Capital Augmented Solow Growth Model
Macroeconomic Themes:22 7
Role of Saving, Investment and Productivity Shock in Economic Growth (Ramsey (1928))
Preference of a representative consumer:
0ttCUt
tC
Max
Budget constraint
tAtLtKFtztMtXtGtItC ,,1
Evolution of the capital stock: tItKtK
11
Boundary conditions: 00 K and 0TK
Macroeconomic Themes:22 8
I n f a c t G D P f r o m t h e s u p p l y s i d e c a n b e d e c o m p o s e d i n t o t h ew o r k i n g a g e p o p u l a t i o n ( P ) l a b o u r f o r c e a n d p a r t i c i p a t i o n r a t e( L / P ) , e m p l o y m e n t r a t e ( E / L ) , t h e p r o d u c t i v i t y o f p e r w o r k e r
a n d t h e c a p i t a l o u t p u t r a t i o a s f o l l o w i n g : QK
EQ
LE
PLPY .
W o r k i n g a g e p o p u l a t i o n ( P ) : a l l i n d i v i d u a l s o f 1 6 y e a r s o l d o ra b o v e .
L a b o u r f o r c e ( L ) : a l l i n d i v i d u a l s a t w o r k ( e m p l o y e d ) o r w h oa r e w i l l i n g t o w o r k a n d a c t i v e l y l o o k i n g f o r a j o b( u n e m p l o y e d ) .
P a r t i c i p a t i o n r a t e ( L / P ) : R a t i o o f l a b o u r f o r c e o f w o r k i n g a g ep o p u l a t i o n .
E m p l o y m e n t r a t e ( E / L ) : P r o p o r t i o n o f l a b o u r f o r c e t h a t i se m p l o y e d .
U n e m p l o y m e n t r a t e ( U / L ) : p r o p o r t i o n o f l a b o u r f o r c e t h a t i sa c t i v e l y l o o k i n g f o r w o r k b u t i s o u t o f w o r k .
P r o d u c t i v i t y r a t e ( Q / E ) : o u t p u t p e r w o r k e r ( w e e k l y , m o n t h l yo r y e a r l y ) . C a p i t a l - o u t p u t r a t i o ( K / Y ) : u n i t s o f c a p i t a l p e r u n i to f o u t p u t .
GDP and Productivity: Manpower or Labour Market Approach
Macroeconomic Themes:22 9
QKg
EQgLEgPLgPgYg
C a p i t a l i n c r e a s e s b y s a v i n g b u t t h e p a r t i c i p a t i o n r a t e ,e m p l o y a b i l i t y a n d p r o d u c t i v i t y o f w o r k e r m a i n l y d e p e n do n t h e i r l e v e l o f e d u c a t i o n a n d t r a i n i n g .
B y r a i s i n g s k i l l s f o r m a l a n d i n f o r m a l e d u c a t i o n n o t o n l yp r o d u c t i v i t y o f w o r k i n g i n d i v i d u a l s b u t a l s oe m p l o y a b i l i t y o f t h o s e i n t h e l a b o u r f o r c e a n dp a r t i c i p a t i o n r a t e a m o n g t h e w o r k i n g a g e p o p u l a t i o n .
G D P i n c r e a s e s e i t h e r b y a n i n c r e a s e i n p o p u l a t i o n o r t h e i rp a r t i c i p a t i o n r a t e , o r b y t h e i r e m p l o y m e n t r a t e o r b yi n c r e a s e i n t h e i r p r o d u c t i v i t y o r b y i n c r e a s e i n c a p i t a l s t o c ko r a n y c o m b i n a t i o n o f t h e s e f a c t o r s o r b y a l l o f t h e m .
GDP Growth, Utilisation of Labour Force and Productivity
Macroeconomic Themes:22 10
Contribution of the Financial Sector in Economic Growth
Financial sector diversifies risks and guarantees efficient allocation ofthe portfolio by households and corporate sector
Investments are based on market evaluation (Tobin’s q). Free and liberal financial market: convertibility and controls of
capital account. Direct foreign in/outward investments to complement national saving Reduce effects of credit rationing, market segmentation and
asymmetric information Avoid economic crises and contagion effects Reduce speculative bubbles and attacks on financial and exchange
rate markets Monitoring, supervision and deposit insurance. Build confidence by assuring inter generational equity, Viability of
pension funds and pay as you go social security system
Macroeconomic Themes:22 11
Ratio of the Gross Domestic Investment to GDP
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
UK
USA
Germany
Japan
Macroeconomic Themes:22 12
Real Exchange Rate Across Countries
0.000
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
19
95
=1
00
UK
US
Japan
Italy
France
Germany
Macroeconomic Themes:22 13
Ratio of Saving to GDP
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
UK
USA
Germany
Japan
Macroeconomic Themes:22 14
Real Interest Rates Across Countries
-4.000
-2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
An
nu
al P
erc
en
t
UK
USA
Japan
Italy
France
Germany
Macroeconomic Themes:22 15
Wrong economics policies generated disturbing fluctuations in1970s and 1980s.
Economic growth is promoted by macroeconomic prudence,outward orientation and domestic liberalisation.
New macroeconomic policy framework includesthe central bank independencecredibility and transparency in economic policyadoption of the golden rule of public finance– borrow only to invest– sustainable long-term public finances
monetary and fiscal co-ordinationforward looking framework of the monetary policy
Emphasis in more investment in education and health.
The tightening of the fiscal policy in last 1990s
These policy steered back to the stability and steady growthcompared that in 1980s.
Fiscal and Monetary Policies for Stability and Growth: Policy in the UK
Macroeconomic Themes:22 16
Cross Industry Productivity MeasureG e r o s k i ( 1 9 9 1 ) u s e s c r o s s s e c t i o n a n d t i m e s e r i e s p o o l i n gr e g r e s s i o n t e c h n i q u e t o m e a s u r e t h e c o n t r i b u t i o n o fi n n o v a t i o n s i n p r o d u c t i o n a m o n g 7 9 t h r e e d i g i t i n d u s t r i e sb e t w e e n 1 9 7 6 - 1 9 7 9 .
it
itI
itftiti
itq
w h e r e itq i s o u t p u t p e r w o r k e r i n i n d u s t r y i , i
tf i n p u t
p e r w o r k e r i n i n d u s t r y i a t t i m e t , i a n d i g i v e s a s e t o f
i n d u s t r y d u m m i e s t a n d t r e f e r s t o t i m e d u m m i e s , a n d
i s t h e itI i s t h e n u m b e r o f i n n o v a t i o n s ( c o u n t m e a s u r e )
b e t w e e n t a n d p e r i o d s w h e r e ....0 .
Macroeconomic Themes:22 17
Cross Country Productivity Measures
P r o d u c t i v i t y i n d e x i n c o u n t r y u : i isu
iL
uiYuA
P r o d u c t i v i t y d i f f e r e n c e b e t w e e n c o u n t r y u a n d k i n s e c t o r
i iskiL
kiY
isuiL
uiY
iC
O v e r a l P r o d u c t i v i t y d i f f e r e n c e b e t w e e n c o u n t r y u a n d k :
uis
kisk
iL
kiY
isi kiL
kiY
uiL
uiYkAuA
Macroeconomic Themes:22 18
Total
non-market Total Market
Services Economy Sectors
1996
US 91.0 127.4 128.5
UK 100.0 100.0 100.0
France 111.8 128.5 120.2
Germany 92.2 114.1 114.3
Japan 90.0 81.0
1999
US 84.3 130.3 139.0
UK 100.0 100.0 100.0
France 107.4 129.4 122.0
Germany 87.3 117.4 119.2
Japan* 88.7 80.7
Productivity Differences Between UK and Her Trading Partners (Source: O'Mahony and De Boer (2002) NIESR report.
www.niesr.ac.uk/research for detailed data set)
Macroeconomic Themes:22 19
Cross Industry Productivity MeasureG e r o s k i ( 1 9 9 1 ) u s e s c r o s s s e c t i o n a n d t i m e s e r i e s p o o l i n gr e g r e s s i o n t e c h n i q u e t o m e a s u r e t h e c o n t r i b u t i o n o fi n n o v a t i o n s i n p r o d u c t i o n a m o n g 7 9 t h r e e d i g i t i n d u s t r i e sb e t w e e n 1 9 7 6 - 1 9 7 9 .
it
itI
itftiti
itq
w h e r e itq i s o u t p u t p e r w o r k e r i n i n d u s t r y i , i
tf i n p u t
p e r w o r k e r i n i n d u s t r y i a t t i m e t , i a n d i g i v e s a s e t o f
i n d u s t r y d u m m i e s t a n d t r e f e r s t o t i m e d u m m i e s , a n d
i s t h e itI i s t h e n u m b e r o f i n n o v a t i o n s ( c o u n t m e a s u r e )
b e t w e e n t a n d p e r i o d s w h e r e ....0 .
Macroeconomic Themes:22 20
Real Cost Reduction Approach: Harberger (1998)
TFP growthover period1=100
AbsoluteAmount ofreal costreduction
Cumulativesum of RCRof (2)
Cumulativeshare ofRCR (3)
Value addedby sector
Cumulativesum ofvalueaddedof (5)
Cumulativeshare ofvalueadded of(6)
Industry (1) (2) (3) (4) (5) (6) (7)1 0.8 80 80 0.16 100 100 0.092 0.6 120 200 0.4 200 300 0.273 0.5 150 350 0.7 300 600 0.55
All therest
0.107 150 500 1 500 1100 1.00
Macroeconomic Themes:22 21
Key Points to Growth Study
(a) always study the components of growth separately(b) the accumulation of human capital by the labour force should
be represented in the labour contribution of the growth equation(c) study externalities of education and technology at the firm level
and spatial dimensions(d) check both firm and industry level reasons for declining
multifactor productivitycross country growth regressions do not reveal much pay attentionto episodes within individual countries.
Macroeconomic Themes:22 22
Policy Implications of Real Cost Reduction
(a) people must perceive real costs in order to reduce them(b) avoid prices that lie(c) excess costs are imposed by ill-conceived regulations and
bureaucratic hurdles(d) international trade distortions are harmful for growth(e) privatisation, sound legal and institutional frameworks are good
for growth(f) political consensus concerning the broad outlines of economic
policy.
Macroeconomic Themes:22 23
agri Min Man Egw constr Trade trnsp Fin pub edu other
1993 6.31% 0.80% 4.40% 9.00% -2.84% 5.60% 2.88% 8.30% 1.98% 6.69% 6.70%
1994 0.69% 9.33% 8.08% -0.69% 7.03% 5.15% 6.82% 7.64% -0.98% 5.44% 8.92%
1995 10.82% 10.69% 6.90% -3.54% 5.73% 5.06% 3.57% 4.11% 0.40% 5.53% 6.29%
1996 -0.26% 20.76% 4.50% 4.45% 4.79% 7.47% 4.15% 6.63% -0.12% 6.36% 9.98%
1997 -13.55% -8.36% 4.26% -0.85% 6.63% 9.34% 7.37% 8.36% -0.13% 5.66% 12.60%
1998 -5.10% -13.46% 0.73% -1.12% 6.01% 7.98% 8.39% 13.44% 0.23% 6.10% 10.43%
1999 -1.56% 11.00% -0.66% 0.05% 6.19% 6.29% 4.61% 6.19% -0.95% 8.00% 7.91%
2000 -7.14% 45.43% 0.83% -1.48% 6.10% 4.30% 5.75% 8.23% 3.75% 7.59% 6.27%
Source: ONS input output table
Import Penetration and Growing and Shrinking Sectors
Macroeconomic Themes:22 24
Why Slow Growth Rates in the Last Two Decades?
Market distortions: higher rates of taxes
Slower Growth Rate of Productivity of Labour
Appreciating exchange rate and destabilising monetary policies
controlled interest rate?
Import penetration and export ratios
Slow growth rate of technology
Imperfect competitions
Lack of modernisation
Macroeconomic Themes:22 25
Barro R. J.(1998) Economic Growth in Cross Sections of Countries, Quarterly Journal ofEconomics May 1991, pp. 407-443.
Bhattarai K. (2002) Welfare Impacts of Equal-yield Tax Reforms in the UK Economy,mimio, University of Hull.
Costello Donna M. (1993) A Cross-Country, Cross-Industry Comparison of ProductivityGrowth The Journal of Political Economy, Vol. 101, No. 2. (Apr., 1993), pp. 207-222.
Thomas F. Cooley, Lee E. Ohanian (1997) Postwar British Economic Growth and theLegacy of Keynes The Journal of Political Economy, Vol. 105, No. 3. (Jun., 1997), pp.439-472.
Jan Fagerberg (1994) Technology and International Differences in Growth RatesJournal of Economic Literature, Vol. 32, No. 3. pp. 1147-1175.
P. A. Geroski (1991)Innovation and the Sectoral Sources of UK Productivity Growth The Economic Journal, Vol. 101, No. 409. (Nov., 1991), pp. 1438-1451.
Arnold C. Harberger (1998) A Vision of the Growth Process The American Economic Review, Vol. 88, No. 1.March, pp. 1-32.
Grossman and Helpman (1991) Innovation and Growth in the Global Economy,Cambridge Mass. MIT Press.
D. Greasley (1992) The Stationarity of British Economic and Productivity Growth 1856-1913 Journal of Applied Econometrics, Vol. 7, No. 2. (Apr. - Jun., 1992), pp. 203-209.
Jones, Charles (CJ) Introduction to economic growth, 2002, 2nd Edition, Norton.
References-1
Macroeconomic Themes:22 26
Catherine Lynde, J. Richmond (1993) Public Capital and Long-run Costs in U.K.ManufacturingThe Economic Journal, Vol. 103, No. 419.July, pp. 880-893.
Michael Kitson, Jonathan Michie (1996) Controversy: Deindustrialisation and Britain'sIndustrial Performance since 1960 Britain's Industrial Performance since 1960:Underinvestment and Relative Decline The Economic Journal, Vol. 106, No. 434., pp.196-212.
Lindbeck a (1983) The Recent Slowdown of Productivity Growth, Economic Journal, 93,13-34.O’Mahony M and W. de Boer (2002) Britain’s relative productivity performance:Updatesto 1999, Final report to DTI/Treasury/ONS, NIESR. London.
Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy,vol. 98, no. 5. Pt. 2, pp. S71-S102.
Mankiw N.G. D., Romer and D.N. Weil (1992) A Contribution to the Empirics ofEconomic Growth, , Quarterly Journal of Economics, pp. 407-437.
R. C. O. Matthews (1969) Why Growth Rates Differ The Economic Journal, Vol. 79,No. 314. (Jun., 1969), pp. 261-268.
Torsten Persson, Guido Tabellini (1994) Is Inequality Harmful for Growth? The American Economic Review, Vol. 84, No. 3. pp. 600-621.
Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy,vol. 98, no. 5. Pt. 2, pp. S71-S102.
Solow, Robert M., 1956: A Contribution to the Theory of Economic Growth, QJE, pp.65-95.
References-2