1Intermediate Macro ZhaoUIUC Econ303Section I: Growth theoryChapter 8: TFP, impact of government policyNumber matters• Capital accumulationis faster if s is higher, z is higher or n is lower. • Quantitatively, which one is more important?2Intermediate Macro ZhaoUIUC Econ303Number matters (page 30-31)Capital accumulation engine will not sustain growth over extended time period. closerfurther3Intermediate Macro ZhaoUIUC Econ303Technological progress overcomes diminishing MPK$120,00090,00060,00030,0000Real GDP per worker $20,000 50,000 80,000 100,000 Physical capital per worker Rising total factor productivity shifts curve upCapital difference only explains 25% of income differenceThe rest is all Solow residual4Intermediate Macro ZhaoUIUC Econ303Two views of technology• Technology as knowledge and blue prints by itself. • Technology as skills workers have (embodied by labor) Solow residual, z, is a combination of A and H.Every percent increase of z, leads to 1% increase of GDP growth rate, GDP per capita growth rate, even without any changes in capital and labor.Only continuous increase of z leads to sustained growth.Expansion of production function • Separate human capital accumulation from technology progress• Human capital, H– HN is quality adjusted labor input– Labor input of 1 high school graduate is 1– Labor input of 1 college graduate is 1.4• Knowledge and know-hows, A• TFP z increases either A or H increases.5Intermediate Macro ZhaoUIUC Econ303Education attainment (25+) by ethnicityHigh School and more College and moreYear Total White Black Hispanic Total White Black Hispanic2000 84.1 84.9 78.5 57 25.6 26.1 16.5 10.61990 77.6 79.1 66.2 50.8 21.3 22 11.3 9.21980 68.6 70.5 51.2 45.3 17 17.8 7.9 7.91970 55.2 57.4 33.7 (NA) 11 11.6 4.5 (NA)1959 43.7 46.1 20.7 (NA) 8.1 8.6 3.3 (NA)1950 34.3 (NA) 13.7 (NA) 6.2 (NA) 2.3 (NA)1940 24.5 26.1 7.7 (NA) 4.6 4.9 1.3 (NA)source: Bureau of Census2010 87.1 87.6 84.2 62.9 29.9 30.3 19.8 13.96Intermediate Macro ZhaoUIUC Econ303Quality of the labor force explains 25-40% of income differenceAccumulation of human capital a la Robert Lucas• Time allocation between production of human capital and other goods– Human capital, 1-u– Other goods, u• Change of human capital over time • Growth rate of human capitalteacher’s human capital student time,on the job trainingefficiency of the education sector7Intermediate Macro ZhaoUIUC Econ303The remaining 35-50% is explained by technology difference, AWhich is which?1. Company A purchases 10 new computers with latest hardware and software. 2. Workers in company A getting trained to use the latest software.3. With new software and trained worker, company A implements the on-demand inventory system, which reduces production cost.4. Company A has to spend man-hours on debt collection as the court system in its country fails to effectively enforce contract. Physical capital accumulationHuman capital accumulationKnowledge and know-howsInstitution or Other8Intermediate Macro ZhaoUIUC Econ303Technology progress• For scientific discovery to show up in TFP and GDP• Theory vs. implementation• Revolution vs. marginal improvement • Invention vs. adoption• Country that is not at the technology frontier can have higher TFP growth temporarily through adopting the existing technology. Computing technology• The "Turing" machine was described by Alan Turing in 1936, which is a thought experiment representing a computing machine. • The microcomputer, small, low-cost computers that could be owned by individuals and small businesses first appeared in the 1970s.• Moore's law: the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every 18 month.•An electronic patient record (EPR) a systematic collection of electronic health information about individual patients. It is a record in digital format that is capable of being shared across different health care settings, by being embedded in network-connected enterprise-wide information systems.9Intermediate Macro ZhaoUIUC Econ303Accelerated growth and development (A great leap forward) The infamous Luddites10Intermediate Macro ZhaoUIUC Econ303Impact of government policy on economic growthMust through the following channelsA. Increase labor input per capita, more workers in the adult populationB. Capital accumulation, more machinesC. Human capital accumulation, better workersD. Technology progress, more efficient use of workers and machinesshort runlong runPolicy and Growth (page 32)Through what channel does the following policy affect economic growth?11Intermediate Macro ZhaoUIUC Econ303Some interesting observation The following have been found to be positively correlated with economic growth. • Fraction of college students in engineering instead of those in law• Distance from equator (latitude)• Genetic distance from the frontier countryWhat kind of story would you tell about these observations?12Intermediate Macro ZhaoUIUC
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