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MACROECONOMICSUNDERSTANDING THE GLOBAL ECONOMY

Total Factor Productivity, Human Capital, and Technology

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.

5-2

Key Concepts

Total Factor Productivity Human Capital Technological Progress Foreign Direct Investment

5-3

Capital

Rea

l GD

P Effect of shift in production function

K0K1

Production Function, Old

Production Function, New

Investment, Old

Investment, New

Depreciation

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Production Function Shift

Increase in Output due to function shift Increase in Labor Increase in TFP

Increase in Output due to increase in capital Economy moves to new steady state As capital increases, output increases

Why does production function shift?

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Human Capital

Skills and knowledge that accumulate over time, embodied in people

© Shutterstock Images

5-6

Human Capital

GDP per capita =

GDP Hours Number Employed Labor Force

Hours Number Employed Labor Force Population

Human Capital increases Labor Productivity

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Capital

Rea

l GD

P More human capital

KLowKHigh

Output, Low Human Capital

Output, High Human Capital

Investment, Low

Investment, High

Depreciation

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Human Capital

Increase means more output, even at current levels of physical capital and labor

Increase means higher steady state level of output and capital

May explain cross-country growth differentials

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Education and Economic growth

420 440 460 480 500 520 540 5600

1

2

3

4

5

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Conditional Student Acheivement Test Score

Co

nd

itio

na

l Gro

wth

of

GD

P p

er

Ca

pit

a 1

96

0-

20

00

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Contribution to Growth

Contribution of Education to Annual Output Growth, 1950 – 1990

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How to increase human capital?

Educational attainment Expenditures on education

Allocation of resources Level of education Cost of education

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Schooling Differences Across Countries

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

19

50

19

80

20

10

Canada France Germany Japan USA UK Russia India China Brazil Kenya

0

2

4

6

8

10

12

14

Primary Secondary Tertiary

Years of Education by level

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Percentage of students completing the final year of primary school

Source: World Bank Millennium Development Goals

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Education Spending and Attainment

0 20000 40000 60000 80000 100000400

450

500

550

423.170731707317

405.284552845528

490.447154471544493.495934959349

489.634146341463

508.333333333333

458.130081300813

519.918699186992

465.040650406504

545.121951219513

502.439024390244500

479.268292682927

494.512195121951494.512195121951

517.479674796748

546.544715447155

529.471544715447521.747967479675

519.105691056911

500.813008130081

460.975609756097

511.382113821138

503.861788617886503.861788617886

488.414634146342

472.967479674797

527.825203252033

Cumulative spending per student (from age 6 to 15, 2006 US Dollars)

Mat

hs

test

sco

re

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Determinants of Efficient Education Expenditure.

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Review

Cross-country differentials in per capita output are substantial Role of physical capital Role of human capital

Significant fraction of differential is unexplained – we call this “TFP” Other elements of TFP

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TFP important

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Institutions

Property Rights Regulatory Institutions Macroeconomic Stabilization Social Insurance Conflict Management Political Rights

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World Bank Indicators

Voice and accountability Political stability and lack of violence Government effectiveness Regulation quality Rule of law Corruption

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Governance and GDP

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5100

1000

10000

100000

Argentina

Canada

Brazil

Australia

Russia

Eq. Guinea

Ethiopia

FinlandFrance

Germany

Ghana

Greece

India

Italy

JapanLuxembourg

Malawi

Malaysia

UK

Nigeria

Philippines

Spain

Turkey

Ukraine

USA

Venezuela

ZambiaZimbabwe

Aggregate Governance Score

GD

P p

er c

pit

a (2

000

$, lo

g s

cale

)

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Corruption Perceptions Index (higher score = less corrupt)

Country Score Country ScoreDenmark 9.3 China 3.5N. Zealand 9.3 Thailand 3.5Singapore 9.3 Greece 3.5Sweden 9.2 India 3.3Canada 8.9 Mexico 3.1Netherlands 8.8 Argentina 2.9Australia 8.7 Indonesia 2.8Hong Kong 8.4 Ethiopia 2.7Germany 7.9 Vietnam 2.7Japan 7.8 Nigeria 2.4UK 7.6 Ukraine 2.4Chile 7.2 Pakistan 2.3US 7.1 Kenya 2.1France 6.8 Russia 2.1Spain 6.1 Venezuela 2.0Poland 5.3 Sudan 1.6S. Africa 4.5 Iraq 1.5Malaysia 4.4 Afghanistan 1.4Italy 3.9 Myanmar 1.4Brazil 3.7 Somalia 1.1

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Bribe Payers Index(higher figure = less likely to bribe)

Country Score Country Score

Belgium 8.8 Spain 7.9

Canada 8.8 Hong Kong 7.6

Netherlands 8.7 South Africa 7.5

Switzerland 8.7 South Korea 7.5

Germany 8.6 Taiwan 7.5

UK 8.6 Italy 7.4

Japan 8.6 Brazil 7.4

Australia 8.5 India 6.8

France 8.1 Mexico 6.6

Singapore 8.1 China 6.5

US 8.1 Russia 5.9

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Rent Seeking

Activity in which value-added produced by one person is taken by another

Examples Water subsidies Sugar tariffs Insider contracts or trading

Concerns Absorbs resources (labor and capital) Acts as a tax Rent seeking crowds out production

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R & D

Growth can be sustained through technological progress

Role of Research and Development in promoting technological progress

Example of South Korea

© Shutterstock Images

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South Korean R&D as a % of GDP

1967 1972 1977 1982 1986 1990 1994 1998 2002 2006 20080

1

2

3

% o

f G

DP

As countries approach their steady state, R&D becomes more important.

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Rich countries spend more on R&D

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5100

1000

10000

100000

China

Czech

FranceGermany

India

Japan

S. KoreaKuwait

Russia

Sweden

Uganda

UKUSA

R&D Expenditure (% of GDP)

GD

P p

er

ca

pit

a $

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Foreign Direct Investment

Investment by foreign firms in an economy Encourages capital accumulation and

technology transfer Can facilitate convergence among countries

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Foreign Direct Investment (FDI)

Net Foreign Direct Investment, (billions of US $)

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Summary

Effect of increases in TFP Effect of human capital accumulation Other influences on growth

Institutions Technological Progress FDI

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