Transcript Econ6021 Microeconomic Analysis Lecture 2: Cost and Production

Case: Growth accounting and the
East Asian economic miracle
Growth Accounting
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Long run growth matters. A 7% increase each year
means that the GDP will double in 10 years, while a
3.5% increase each year means 20 years. (rule of 70)
The growth is due to inspiration (technology growth) or
perspiration (input increases)? Three eye-catching
episodes
 US productivity growth slowdown since early 70s’
 Asian economic miracle from 50s’ to early 90s’
 The so called “new economy” in the US since mid
90s’
The note shows that knowledge about production
function enables us to study this issue systematically.
The Productivity Growth Slowdown in 1970-1990 (US)
Growth Rate
% per year)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0
1870- 1890- 1910- 1930- 1950- 19701890 1910 1930 1950 1970 1990
Similar patterns also exhibit in other developed economies
Asian economic miracle:
annual growth of output/capita (60-85)
1
2
3
4
5.
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Botswana
Taiwan
Hong Kong
Singapore
S. Korea
Japan
Malta
Lesotho
Egypt
Cyprus
Gabon
Greece
Brazil
Syria
Portugal
Malaysia
Yugoslavia
China
Thailand
Norway
Cameroon
Congo
Italy
Panama
Spain
Finland
Morocco
Israel
Austria
Tunisia
Iceland
France
Jordan
Denmark
Belgium
Netherlands
Paraguay
Canada
Burma
W. Germany
0.067
0.062
0.059
0.059
0.057
0.055
0.053
0.051
0.050
0.049
0.045
0.044
0.042
0.041
0.041
0.039
0.039
0.038
0.038
0.036
0.036
0.035
0.035
0.035
0.035
0.035
0.034
0.034
0.033
0.032
0.032
0.030
0.029
0.028
0.028
0.027
0.027
0.026
0.026
0.026
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42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
Turkey
Algeria
Sweden
Ecuador
Ireland
Mexico
Suriname
Iran
Swaziland
Barbados
Mauritius
Luxembourg
Pakistan
Tanzania
Gambia
Colombia
Australia
Dom. Rep.
U.S.A.
U.K.
Costa Rica
Togo
Cape Verde
Trin. & Tob.
Switzerland
Zimbabwe
Fiji
Philippines
South Africa
PNG
Venezuela
Ivory Coast
Sri Lanka
N. Zealand
Honduras
Bolivia
Malawi
Rwanda
Iraq
El Salvador
0.026
0.026
0.026
0.026
0.025
0.025
0.024
0.023
0.023
0.023
0.023
0.023
0.023
0.023
0.023
0.023
0.022
0.022
0.021
0.021
0.021
0.019
0.019
0.018
0.017
0.017
0.016
0.016
0.016
0.015
0.015
0.014
0.014
0.014
0.013
0.013
0.012
0.012
0.012
0.012
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
Kenya
Guatemala
Jamaica
Peru
Saudi Arabia
Nepal
Ethiopia
Chile
Argentina
Sierra Leone
Uganda
Burundi
Guinea
India
Bangladesh
Nicaragua
Niger
Uruguay
Benin
Senegal
Haiti
Mauritania
Liberia
Sudan
Somalia
Zaire
Nigeria
Afghanistan
Mali
CAR
Ghana
Guyana
Madagascar
Chad
Zambia
Angola
Mozambique
Kuwait
0.011
0.011
0.011
0.010
0.009
0.009
0.009
0.008
0.007
0.006
0.006
0.005
0.005
0.005
0.005
0.003
0.001
0.001
0.001
0.001
0.000
-0,000
-0.001
-0.001
-0.002
-0.002
-0.002
-0.003
-0.004
-0.006
-0.008
-0.010
-0.016
-0.017
-'0.017
-0.018
-0.020
-0.080
Was the Asian economic miracle
really a miracle?
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“No!” said Krugman in his famous 1994
Foreign Affairs’ article, which made him
famous to the world outside the economic
profession.
Relying on work by Young and Lau, he
argued that the growth of the four tigers
was largely due to increase in inputs
(perspiration) rather than to increase in
technology (inspiration).
Now let’s turn to the so called “Asian miracle.” (The following
figures are taken from a paper by A. Young 1994, European
Economic Review.)
Participation rates & growth (1960-85)
Annual growth of output/worker
(60-85)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Botswana
Gabon
Lesotho
Taiwan
Japan
Egypt
South Korea
Hong Kong
Greece
Syria
Cameroon
Congo
Cyprus
Singapore
Malta
0.076
0.069
0.057
0.055
0.054
0.053
0.050
0.047
0.047
0.046
0.045
0.043
0.043
0.043
0.040
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Yugoslavia
Spain
Thailand
Italy
Brazil
Austria
Swaziland
Portugal
Malaysia
Jordan
Turkey
Panama
Gambia
Algeria
China
0.039
0.037
0.037
0.037
0.037
0.035
0.035
0.035
0.034
0.034
0.033
0.033
0.033
0.033
0.033
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
Israel
Morocco
Finland
France
Tunisia
Ecuador
Norway
Tanzania
Burma
Pakistan
Ivory Coast
Ireland
Paraguay
W. Germany
Belgium
0.032
0.031
0.031
0.029
0.028
0.027
0.027
0.027
0.027
0.027
0.026
0.026
0.025
0.025
0.025
Investments in the NICs
I/GDP ratios
Annual Growth of “Total Factor
Productivity” (1970-1985)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Egypt
Pakistan
Botswana
Congo
Malta
Hong Kong
Syria
Zimbabwe
Gabon
Tunisia
Cameroon
Lesotho
Uganda
Cyprus
Thailand
Bangladesh
Iceland
Italy
Norway
Finland
Taiwan
Ecuador
0.035
0.030
0,029
0.028
0.026
0.025
0,025
0.024
0.024
0.024
0.024
0.022
0.021
0.021
0.019
0,019
0,018
0.018
0.017
0.015
0.015
0.014
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24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
Guinea
South Korea
Iran
Burma
Mauritius
China
Denmark
Israel
Greece
Japan
Luxembourg
Yugoslavia
Tanzania
Colombia
Sweden
Malaysia
Malawi
Brazil
Panama
U.K.
W. Germany
Mali
0.014
0.014
0.014
0.014
0.013
0.013
0.013
0.012
0.012
0.012
0.012
0.011
0.011
0.011
0.010
0.010
0.010
0.010
0.009
0.009
0.009
0.008
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
Turkey
Netherlands
Ethiopia
Austria
Australia
Spain
Kenya
France
Liberia
Paraguay
Honduras
Portugal
U.S.A.
Belgium
Canada
Algeria
CAR
India
Singapore
Sri Lanka
Fiji
Switzerland
0.008
0.008
0.007
0.007
0.007
0.006
0.006
0.005
0.004
0.004
0.004
0.004
0.004
0.004
0.003
0.003
0.002
0.001
0.001
0.001
0.001
0.000
The TFP growths of the four tigers were not miraculous any more!!
What is TFP?
q  A(t ) f ( K , L)
dq dA
df ( K , L)

f ( K , L)  A
dt dt
dt
1 dq dA f ( K , L) A  f dK f dL 

 

q dt dt
q
q  K dt L dt 
dq / dt dA / dt 1  f dK / dt
f dL / dt 

 K
L
q
A
f  K K
L L 
f / f
f / f
Gq  G A 
GK 
GL
K / K
L / L
Gq  G A  eq , K GK  eq , L GL
eq , K  elasticityof output with respect tocapitalinput
eq , K  elasticityof output with respect tolabor input
What is TFP?
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Essentially, TFP is a “measure of our
ignorance” (growth that cannot be explained
otherwise)
Solow (1957) found that, for the US during the
period 1909 to 1949, Gq=2.75% per year;
GL=1% ; GK=1.75% ; eqL=0.65; and eqK=0.35
Hence, GA=Gq - eqlGL - eqLGK=1.50
That is, more than half of the growth in real
output could be attributed to technical change
rather than to growth in the physical quantities
of inputs.
More complicated production
functions can be used ...
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For instance, production function: Y=AF(L,K,H,N) where H
is human capital and N is natural resources.
Young (1995, Quarterly Journal of Economics) still finds
similar results of TFP growth as previous slide shows.
Kim and Lau (1994, J of J&IE) find that the hypothesis
TFP growth rates of 4 little dragons equal to zero cannot
be rejected.
A reminder: some authorities in the area (Jorgenson and
Griliches (1967)) have argued that TFP is a result of mismeasurement of factor inputs and therefore does not
really exist.
Despite difference, the following are agreed
between both sides of the debate
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A moderate conclusion: four tigers’ growth
was not a miracle, but not completely due to
perspiration as well. Hong Kong people
should not be too pessimistic about the
findings.
Growth relies solely on input increase is
bound to diminishing (marginal) returns
Less developed countries can usually grow at
a greater rate than their more developed
counterparts due to the catch-up effect
To conclude, 4 little tigers cannot grow as
fast as before.