2 Divergent Patterns of Economic growth GDP per capita (1996 PPP)Y2003Y1960Average Annual growth rateIncome as a share of US Income19602003Senegal181815570.86=86%-0.220.150.04Botswana95882328.59=859%5.330.080.22
3 Factor Accumulation, Productivity Growth, and Economic Growth AvailabilityProductive UseProductivity GrowthEfficiencyTechnological changeLeads to major shifts in the composition of output
6 Saving, Investment, and Capital Accumulation New Investment increases the capital stockThe value of new investment must be larger than the amount of depreciation of existing capital.“Capital” can be physical capital, human capital, etc., that is, it can be machines, education, hospitals, etc.
7 Saving, Investment, and Capital Accumulation Investment is financed by savingTo produce goods that will produce other goods, we have to give up consumption (i.e., save) today.E.g., education involves staying out of the labor market for a while.
8 Saving, Investment, and Capital Accumulation Saving comes from current incomeHousehold savingCorporate retained earningsGovernment surplus
9 Saving, Investment, and Capital Accumulation Investment is uncertain: Investments in education only pay off ifComplementary inputs existYou are allowed by the government to practiceYour income is not taken by thugsYour skills remain useful throughout your life.
10 Saving, Investment, and Capital Accumulation Sustaining economic growth requires both generating new investment and ensuring the investment is productive.
11 Growth Accounting 80-90 90-95 95-00 00-04 gY 3.3% 2.5% 4.2% 2.4% gL United StatesBasic data for growth accounting80-9090-9595-0000-04gY3.3%2.5%4.2%2.4%gL1.7%1.3%1.9%-0.4%gK4.9%3.5%5.8%3.2%WK0.290.30a0.6%0.5%1.1%
12 Growth Accountinga is the measure of Total Factor Productivity … and of our ignoranceTFP plays less of a role than factor accumulation in developing countries (compared to industrial countries)
13 Characteristics of rapidly developing countries Based on cross-country regressions: what are the determinants that makes countries growth differently?We don’t know exactly how these factors contribute to growthWe don’t know which causes which.
17 Better health and education make workers more productive: They make businesses more likely to investThey make people more likely to save for the future
18 Better governance and rule of law, better bureaucracies and property rights, more effective and less burdensome regulation, less corruption:They make businesses more likely to investThey make people more likely to save for the future
25 Diminishing returns and the production function Diminishing returns means that, ceteris paribus, new investment in a poor country will have a much larger impact on output than the same investment in a rich country.This means:
26 Diminishing returns and the production function Ceteris paribus, poor countries have much larger growth potential.Ceteris paribus, growth will slow as a country gets richerCeteris paribus, poor and rich countries will converge.
27 Diminishing returns and the production function What is the ceteris that we are assuming to be paribus?Same production functionSame technologySame saving rateIf so, then growth is derived primarily from factor accumulation and not productivity growth
32 Convergence in countries with similar policies?
33 Structural Change How does the composition of output change? Engel’s LawShare of Y produced by agriculture declines, industry and services get a bigger share.Share of Population in agriculture declines (but not as rapidly as the share of Ag in Y), industry and services get a bigger share.
34 Patterns of Development, 1950-1970, with Moises. Syrquin, 1975.
37 Structural Change How does the composition of output change? Population becomes urbanizedWhy? Economies of scale; common resources for industrial production.Larger share is sold through markets rather than produced for own consumption