- Output=productivity x factors of production i.e. y=A x k^αh^(1-α)
- Growth rate of output = growth rate of productivity + growth rate of factors of production.
- Productivity = f(technology, cutting edge of technology, efficiency, open economy)
- Technology - unlike capital - is nonrival which means easy transfer, but also means there are less incentives for creation because of a lack of excludability.
- Efficiency = effectiveness with which factors of production and technology are combined to produce output - it's an umbrella concept for differences other than technology where A=TxE
- Development accounting involves breaking down differences in income into a productivity part and a factor of production part:
- Ratio of productivity = Ratio of output / Ratio of factors of production
- Growth accounting A-hat = y-hat - αk-hat-(1-α)h-hat
- Technology growth can overcome problems of diminishing returns
- 75% of R&D is done by firms who are motivated by profits and the hope of 1. competitive adv (patents?) 2. size of the market 3. how long will adv last? 4. limited uncertainty
- Break even point for technology gaps and efficiency is more than 100 years. Thus most of the difference is due to inefficiencies.
- Featherbedding is when increases in price lead to unions forcing capitalists to pay higher wages/hire workers that are not needed.
- Types of inefficiency - 1. unproductive activities (e.g. rent-seeking, theft), 2. idle resources 3. misallocation of factors among sectors (due to barriers to mobility &. wages not equal to marginal product - discrimination? 3. misallocation of factors among firms (e.g. government firms/monopoly) 4. technology blocking (not from patents etc.) - often violence related
- Two times of international interaction 1. trade 2. flows of factors of production
- Test for openness is law of one price (though there are transport costs)
- Globalisation is due to 1. lower transport costs.2. transmission of information 3. more open trade policy (less tariffs, quotas, excessive standards, anti-dumping duties)
- Openness is highly correlated with GDP/capita but does it cause?
- Compare growth rates in open and closed countries & find closed group is 1.5% vs open at 3.1%. Also, closed no relationship between GDP/capita and growth rate, open countries though offer strong evidence of convergence
- Changes in openness affect growth rates? Increased openness e.g. South Korea lead to increased growth. Decreased openness lead to decreased growth.
- Used geography as randomly exogenous variable and found that when trade rose, income rose, and when trade fell income fell.
- Openness through factor accumulation or productivity? Not factor accumulation as capital flows aren't sufficient.
- Productivity 1. Comparative Adv/Specialization 2. More able to import existing technologies/capital/business practices. 3. Larger markets (bigger incentives to invest) 4. Increases efficiency by reducing monopoly power/increased foreign competition 5.Economies of scale from increased output
- We find large productivity differences between countries where India's productivity per worker is just 31% of USA's.
- We find that factors of production (47%) are roughly just as important as productivity (53%) and they tend to rise together.
- In US we find that productivity grew at 0.54% per year which makes up 40% (0.54%/1.34%) of the growth rate of output per worker. Across countries we find there is often negative productivity growth in poor poor countries. Across countries we find that 68% of the variation in growth rates is due to variation in productivity growth and 32% is because of factor accumulation.
- Alwyn Young found that Hong Kong's growth was primarily productivity, Singapore primarily capital accumulation (esp. human) which is unsustainable.
- Russian workers - even post communism are only 20% as productive as US workers - this is a difference in efficiency not technology.
- Globalisation in two waves 1. peaking pre WWI with world exports at 8% of world GDP 2. now 24% in 2010. Between 1870 and 1925 100m changed countries ~ 10% of the world's population in 1870, much lower today.
- 1990s study found non-tariff barriers roughly equal to tariff barriers. Though average tariff rates have fallen dramatically from 40% at the end of WW2 to 6% in 2000 and 2.8% among OECD countries.
- In Japan only 27% of tech progress originated domestically, Canada 3%, US is the only country with a majority being domestic at 82%
- Problems arise in inadequate measurements of factors of production, making the remainder (productivity) inaccurate.
- Oftentimes economists overestimate the level of investment (particularly in developing countries) because corruption means much less money is going into companies than they think.
- Technological changes comes with creative destruction and potentially harmful side effects for society.
- Patents have a number of problems incl. 1. inefficiency of monopoly 2. preventing other firms R&D (e.g. delays in patent applications to 3 years) 3. existence of patent trolls. Alternatives incl: 1. secrecy > patents. 2. open source movement
- Opposition to openness comes from self-interested parties who are going to suffer from trade (though less than net national interest) e.g. a particular industry, or factor of production. Other weak arguments are:
- Exploitation - workers wouldn't take those jobs unless they didn't have better alternatives
- Poor countries can't compete - it's exchange not competition.
- Environmental exploitation.
- Loss of national sovereignty
- Ability to levy taxes (f.o.p. can just leave)
- Costs of foreign capital 1. subject to international investors --> macro shocks 2. allow go into debt