Microeconomic foundations of aggregate output growth

Lionel Artige HEC – Université de Liège 12/12/2010

Two ways of modeling economic growth

• Aggregate production function: Output growth results from the growth of aggregate production factors (capital, labor and technology). Income growth inequalities are related to factor endowments and technological combinations.

• Aggregate outcome of firm dynamics: Output growth results from the aggregation of the dynamics of heterogeneous firms. Income growth inequalities are related to the degree of heterogeneity and the dynamics of firms. For given quantities of aggregate capital and labor, for given available technologies, aggregate growth depends on the firms’ dynamics.

Macroeconomic level Aggregate Output growth Distribution of firms’ growth rates Age Sector Size Market structure Spatial location (agglomeration externalities) conditional on Firms’ growth Surviving = g(age, size, sector, …) Exiting = f(age, size, sector, …) Microeconomic level Heterogeneous firms New (entry) Existing (surviving)