Lecture ch6 (II) Hul213

Macroeconomics (HUL213)
Lecture 09
Feb 08; 2024
Growth and Ideas
Explaining the above graph
▶ Consider a one-time, permanent increase in fraction of labor

¯ in the year 2030.
in R&D, l,
▶ There are two consequences:
▶ The growth rate is higher: more researchers produce more
ideas, which leads to faster growth.
▶ The initial level of output per person declines.
▶ There are fewer workers in the consumption goods sector, so
production per person must fall initially.
Growth with finite resources
▶ Can economic growth be sustained given that we live on a

planet with finite resources?
▶ Thought experiment: What do you think has happened to the
price of aluminum, copper, coal, and other raw materials
during the past century?
▶ A standard supply-and-demand analysis might go like this:
Commodities are in finite supply.
▶ There is a massive increase in the demand for these resources.
Increases in demand combined with a fixed supply is a recipe
for enormous increases in price.
▶ The graph in the last slide shows that this is not the case.
Growth with finite resources
▶ How can this be true? What was wrong with our basic
supply-and-demand intuition?
▶ Our story about demand is surely correct:
▶ It turns out that rather than being finite, supply must have
expanded by even more than demand.
▶ We found new supplies of these resources and discovered new
technologies for extracting.
▶ We discovered new ways to use these resources more
efficiently.
▶ On net, these supply forces evidently outweighed the massive
increases in demand during the twentieth century, leading to
large overall price declines.
▶ We can use the labor-adjusted growth rate version of the
production function to determine the unobserved residual
(TFP growth).
▶ Suppose that the number of hours worked by the labor force
can change over time:
▶ When the economy is booming, people may work more hours
per week.
▶ When the economy is in a recession, people may work fewer
hours per week.
Growth accounting - 2
▶ The equation in the last slide tells us that the growth rate of
output per hour, YL , over a time period can be viewed as the
sum of three terms.
▶ The first term is the contribution from the growth of capital
per hour worked by the labor force. As capital per hour rises,
output per hour rises as well, but this effect is reduced
according to the degree of diminishing returns to capital,
one-third.
▶ The second term is the growth rate of workers less the growth
rate of total hours. In actual applications of growth
accounting, this term can also include increases in education
or changes in the age distribution of the workforce.
▶ Therefore, we call it “labor composition.”
Growth accounting - 2
▶ The last term is the growth rate of TFP.

▶ Faster productivity growth also raises the growth rate of
output per hour.
▶ We can measure:
▶ The growth rate of output per hour
▶ The growth rate of capital per hour
▶ The labor force compositions
▶ Using these measures, we can account for the sources of
growth in any given country.
▶ Since we can observe everything other than TFP, we use our
equation as a way to measure the unobserved TFP growth.
▶ For this reason, TFP growth is also sometimes called “the
residual.”
Growth accounting numbers: an example
Growth accounting numbers: an example
The above table shows the Growth Accounting for the United
States:
▶ It shows the four terms of the adjusted growth equation for
the United States.
▶ It is shown for the entire period 1948 to 2017, and then for
particular subperiods.
▶ Output per hour grew at an average annual rate of 2.3
percent between 1948 and 2017. Of this 2.3 percent,
▶ 0.9 percentage points were due to an increase in the capital
labor ratio, K /L.
▶ 0.2 percentage points came from changes in the composition
of the labor force, including increased years of education.
▶ TFP growth accounted for the majority of growth, at 1.2
percentage points.
Thank you!

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Lecture ch6 (II) Hul213

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Macroeconomics (HUL213)

▶ Consider a one-time, permanent increase in fraction of labor

▶ Can economic growth be sustained given that we live on a

▶ The last term is the growth rate of TFP.

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