MACROECONOMICS CHAPTER 10
Growth Empirics and Policy
Growth accounting The purpose of growth accounting:
● To decompose the observed growth in output into
○ growth in capital,
○ growth in labor
○ advances in technology.
● It provides a way to measure the pace of
technological progress.
From Growth Theory to Growth Empirics When the Solow growth model is forced to confront the
facts.
Balanced Growth Balanced growth:
● When the values of many variables rise together
in the steady state due to Technological progress
Variables Y/L and K/L:
● According to the Solow model, Y/L and K/L grow
at g (rate of technological progress) in the steady
state.
○ U.S. data for the past half century show
that the capital–output ratio has remained
approximately constant over time.
Variable of Factor Prices:
● Technological progress also affects factor prices
● In the steady state, the real wage grows at the
rate of technological progress.
● The real rental price of capital, however, is
constant over time
Convergence Convergence:
● A process of catch-up
○ Economies that start off poor → grow
faster than economies that start off
rich
○ Result → poor economies catch up
with the rich economies
● If convergence does not occur
○ Countries that start off behind are likely to
remain poor.
The Solow Model on Convergence:
● Predicts when convergence should occur.
● It depends on why they differ in the first place.
● If two economies start off with different capital
stocks but the same steady state
○ expect the two economies to converge;
● If two economies have different steady states
○ Don’t expect convergence
○ (perhaps because of different rates of
, MACROECONOMICS CHAPTER 10
Growth Empirics and Policy
saving or population growth)
Convergence in International Data:
● If examine only data on income per person
○ Little evidence of convergence
○ Countries that start off poor do not grow
faster on average than countries that start
off rich.
○ This suggests that different countries have
different steady states
● If statistical techniques are used to control for
some of the determinants of the steady state
○ such as saving rates, population growth
rates, and accumulation of human capital
(education)
○ Then the data show convergence at a rate
of about 2% per year.
● Conclusion:
○ The economies of the world exhibit
conditional convergence
○ They appear to be converging to their own
steady states, which in turn are
determined by variables such as the rates
of investment, population growth, and
human-capital accumulation.
Factor Accumulation Versus Production Efficiency International differences in income per person can
be attributed to:
● Differences in the factors of production
○ Such as the quantities of physical and
human capital
● Differences in the efficiency with which
economies use their factors of production
○ A worker in a poor country may be poor
because the tools and skills he has are
not being put to their best use.
In terms of the Solow model:
● Is the large gap between rich and poor nations is
explained by:
○ Differences in capital accumulation
(including human capital)
○ OR
○ Differences in the production function?
Factor Accumulation VS Production Efficiency:
● Research shows both are important
● A common finding→they are positively
correlated
○ Nations with high levels of physical and
human capital also tend to use those
factors more efficiently
Growth Empirics and Policy
Growth accounting The purpose of growth accounting:
● To decompose the observed growth in output into
○ growth in capital,
○ growth in labor
○ advances in technology.
● It provides a way to measure the pace of
technological progress.
From Growth Theory to Growth Empirics When the Solow growth model is forced to confront the
facts.
Balanced Growth Balanced growth:
● When the values of many variables rise together
in the steady state due to Technological progress
Variables Y/L and K/L:
● According to the Solow model, Y/L and K/L grow
at g (rate of technological progress) in the steady
state.
○ U.S. data for the past half century show
that the capital–output ratio has remained
approximately constant over time.
Variable of Factor Prices:
● Technological progress also affects factor prices
● In the steady state, the real wage grows at the
rate of technological progress.
● The real rental price of capital, however, is
constant over time
Convergence Convergence:
● A process of catch-up
○ Economies that start off poor → grow
faster than economies that start off
rich
○ Result → poor economies catch up
with the rich economies
● If convergence does not occur
○ Countries that start off behind are likely to
remain poor.
The Solow Model on Convergence:
● Predicts when convergence should occur.
● It depends on why they differ in the first place.
● If two economies start off with different capital
stocks but the same steady state
○ expect the two economies to converge;
● If two economies have different steady states
○ Don’t expect convergence
○ (perhaps because of different rates of
, MACROECONOMICS CHAPTER 10
Growth Empirics and Policy
saving or population growth)
Convergence in International Data:
● If examine only data on income per person
○ Little evidence of convergence
○ Countries that start off poor do not grow
faster on average than countries that start
off rich.
○ This suggests that different countries have
different steady states
● If statistical techniques are used to control for
some of the determinants of the steady state
○ such as saving rates, population growth
rates, and accumulation of human capital
(education)
○ Then the data show convergence at a rate
of about 2% per year.
● Conclusion:
○ The economies of the world exhibit
conditional convergence
○ They appear to be converging to their own
steady states, which in turn are
determined by variables such as the rates
of investment, population growth, and
human-capital accumulation.
Factor Accumulation Versus Production Efficiency International differences in income per person can
be attributed to:
● Differences in the factors of production
○ Such as the quantities of physical and
human capital
● Differences in the efficiency with which
economies use their factors of production
○ A worker in a poor country may be poor
because the tools and skills he has are
not being put to their best use.
In terms of the Solow model:
● Is the large gap between rich and poor nations is
explained by:
○ Differences in capital accumulation
(including human capital)
○ OR
○ Differences in the production function?
Factor Accumulation VS Production Efficiency:
● Research shows both are important
● A common finding→they are positively
correlated
○ Nations with high levels of physical and
human capital also tend to use those
factors more efficiently
