Chap 12 – measuring growth in GDP and determinants of GDPI. Measuring growth in GDPThe Variety of Growth ExperiencesSlide 4II and III. The Production Function, its properties and the determinants of productivitySlide 6The Production FunctionSlide 8Slide 9Slide 10Slide 111Chap 12 – measuring growth in GDP and determinants of GDP •Measuring growth in GDP•The production function, it’s properties and the measure of productivity •Determinants of productivity•Economic growth, it’s determinants and public policy2I. Measuring growth in GDPCompounding refers to the growth rate from the year (t – 1) to the year t is measured as,g = where Yt represents output at time t. Equation can be written as Assuming g to be constant over all years, starting from an initial year 0, after T years, output becomes,Even if g and Y0 are small, YT can become very large if3The Variety of Growth ExperiencesCountryPeriodReal GDP perPerson atBeginning of PeriodReal GDP perPerson at End of PeriodGrowth Rate(per year)J apan 1890-1997 $1,196 $23,400 2.82%Brazil 1900-1990 619 6,240 2.41Mexico 1900-1997 922 8,120 2.27Germany 1870-1997 1,738 21,300 1.99Canada 1870-1997 1,890 21,860 1,95China 1900-1997 570 3,570 1.91Argentina 1900-1997 1,824 9,950 1.76United States 1870-1997 3,188 28,740 1.75Indonesia 1900-1997 708 3,450 1.65United Kingdom 1870-1997 3,826 20,520 1.33India 1900-1997 537 1,950 1.34Pakistan 1900-1997 587 1,590 1.03Bangladesh 1900-1997 495 1,050 0.78.4Figures in column 5 are calculated as follows:for Japan, 23,400 = 1,196 (1 + g)107. The solution of g for this equation is 2.82%.Growth rates are not usually Doubling time of the level of outputAccording to the rule of 70, if some variable grows at a rate of x percent per year, then that variable doubles in approximately 70/x years.$5,000 invested at 7 percent interest per year, will double in size in 10 years, because 70/7 = 105II and III. The Production Function, its properties and the determinants of productivityY = A F(L, K, H, N) Y = quantity of outputA = available production technologyL = quantity of laborK = quantity of physical capitalH = quantity of human capitalN = quantity of natural resourcesF( ) is a function that shows how the inputs are combined.6productivity (more precisely labor productivity) is defined asDeterminants of labor productivity:1.Capital per worker2.Human capital per worker3.Natural resource per worker4.Technology7The Production Function•A production function has if, for any positive number x,xY = A F(xL, xK, xH, xN)•That is, a of all inputs causes the amount of output .•Setting x = ,Y/ L = A F(1, K/ L, H/ L, N/ L)where, Y/L = output per worker, K/L = physical capital per worker, H/L = human capital per worker, N/L = natural resources per worker8IV. Economic growth, it’s determinants and public policyDeterminants: 1. domestic savings and investmentTo increase physical capital stock for the future, society mustrole of financial markets: financial markets bring together diminishing returns (catch-up effect) and limits on growthall factors of production, in particular capital is subject to Geometrically, the production function in the per worker form92. foreign investmentforeign direct investment foreign portfolio investmenteffect on GDP and growth3. education or investment on human capitalHuman capital generates . Hence brain drain creates a .Public policies subsidizing education104. Health and nutrition5. property rights and political stability6. free trade117. Fostering R & D8. Managing population
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