Economic Growth and Productivity Analysis

Study Notes

Growth accounting determines the sources of growth in an economy and how these sources may change over time.
Growth accounting applies growth rate rules to the production function to determine the growth rate of output.
Growth accounting can also be used to determine the contribution of different inputs, such as capital and labor, to economic growth.
The Solow and Romer models provide a basis for analyzing differences in growth across countries.
The Solow and Romer models do not address why investment rates and total factor productivity (TFP) differ across countries.

Output growth in the United States slowed between 1973-1995 compared to 1948-1973. This is known as the productivity slowdown.
Output growth increased again during the 1995-2007 period, almost reaching the level of growth before 1973-1995. This period is called the new economy.

The Romer model distinguishes between ideas and objects.
Output requires knowledge and labor in the Romer model.
The model assumes constant returns to scale in objects alone and increasing returns to scale in objects and ideas.
The Romer model features a production function where output is equal to the stock of ideas multiplied by the number of workers producing output.
New ideas in the Romer model depend on the number of workers dedicated to producing ideas, the existence of ideas in the previous period, and worker productivity.
The Romer model highlights that unregulated markets underprovide ideas.

The Romer model can be solved by expressing endogenous variables (such as the number of workers producing ideas and the number of workers producing output) in terms of the parameters of the model.
Output per person in the Romer model depends on the stock of knowledge.
The Romer model predicts a constant growth rate of knowledge, leading to long-run growth.

The combined Solow-Romer model assumes nonrivalry of ideas, leading to long-run growth along a balanced growth path.
Transition dynamics are observed in this combined model, with countries adjusting their capital stocks and potentially growing at different rates in the short run.
In the long run, countries are predicted to grow at the same rate under this combined model.
The combined model produces a balanced growth path where output, capital, and the stock of ideas all grow at constant rates.

The Romer model features long-run growth due to the nonrivalrous nature of ideas and increasing returns to scale in objects and ideas.
The model does not exhibit diminishing returns to ideas, leading to sustained growth in contrast to the Solow model where capital eventually has diminishing returns.
The model highlights a balanced growth path where all endogenous variables (output, capital, knowledge) grow at constant rates.

Many of the poorest countries have the worst institutions, highlighting the crucial role of institutions in economic growth.
Economic growth can potentially be sustained even with finite resources due to continuous technological progress and falling prices of industrial commodities.
The industrialization of China and India has had a significant impact on global commodity prices.
The United States has more researchers than Luxembourg has people, highlighting the importance of research and development for economic growth.

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