ECON 202: Macroeconomics ILecture 5 - Growth Facts & Solow Growth

John Grigsby

January 16, 2017

Grigsby Lecture 2 - Growth Facts January 16, 2017 1 / 14

The Kaldor (1961) Facts of Growth

1 Output per capita (labor productivity) has grown at a sustained rate

2 Capital per worker has grown at a sustained rate

3 The trend in capital and output are about the same, socapital/output ratio is constant

4 Wages and profits have occupied a roughly constant share of nationalincome

5 Constant profit share + constant capital share implies constant returnon capital

6 Some countries grow faster than others

Grigsby Lecture 2 - Growth Facts January 16, 2017 2 / 14

The Kaldor (1961) Facts of Growth

1 Output per capita (labor productivity) has grown at a sustained rate

2 Capital per worker has grown at a sustained rate

3 The trend in capital and output are about the same, socapital/output ratio is constant

4 Wages and profits have occupied a roughly constant share of nationalincome

5 Constant profit share + constant capital share implies constant returnon capital

6 Some countries grow faster than others

Grigsby Lecture 2 - Growth Facts January 16, 2017 2 / 14

The Kaldor (1961) Facts of Growth

1 Output per capita (labor productivity) has grown at a sustained rate

2 Capital per worker has grown at a sustained rate

3 The trend in capital and output are about the same, socapital/output ratio is constant

4 Wages and profits have occupied a roughly constant share of nationalincome

5 Constant profit share + constant capital share implies constant returnon capital

6 Some countries grow faster than others

Grigsby Lecture 2 - Growth Facts January 16, 2017 2 / 14

The Kaldor (1961) Facts of Growth

1 Output per capita (labor productivity) has grown at a sustained rate

2 Capital per worker has grown at a sustained rate

3 The trend in capital and output are about the same, socapital/output ratio is constant

4 Wages and profits have occupied a roughly constant share of nationalincome

5 Constant profit share + constant capital share implies constant returnon capital

6 Some countries grow faster than others

Grigsby Lecture 2 - Growth Facts January 16, 2017 2 / 14

The Kaldor (1961) Facts of Growth

1 Output per capita (labor productivity) has grown at a sustained rate

2 Capital per worker has grown at a sustained rate

3 The trend in capital and output are about the same, socapital/output ratio is constant

4 Wages and profits have occupied a roughly constant share of nationalincome

5 Constant profit share + constant capital share implies constant returnon capital

6 Some countries grow faster than others

Grigsby Lecture 2 - Growth Facts January 16, 2017 2 / 14

The Kaldor (1961) Facts of Growth

1 Output per capita (labor productivity) has grown at a sustained rate

2 Capital per worker has grown at a sustained rate

3 The trend in capital and output are about the same, socapital/output ratio is constant

4 Wages and profits have occupied a roughly constant share of nationalincome

5 Constant profit share + constant capital share implies constant returnon capital

6 Some countries grow faster than others

Grigsby Lecture 2 - Growth Facts January 16, 2017 2 / 14

Output per Capita Grown at Constant Rate (≈ 2% in US)

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Grigsby Lecture 2 - Growth Facts January 16, 2017 3 / 14

Capital per Worker Grows at Constant Rate

Source: Karthik Nagarajan

Grigsby Lecture 2 - Growth Facts January 16, 2017 4 / 14

Constant Capital/Output Ratio

Source: Karthik Nagarajan

Grigsby Lecture 2 - Growth Facts January 16, 2017 5 / 14

Share of Labor in National Income Constant ≈ 2/3

Source: Enghin Atalay: http://ssc.wisc.edu/~eatalay/econ899_15/

slides_transformation.pdf

Grigsby Lecture 2 - Growth Facts January 16, 2017 6 / 14

Share of Labor in National Income Constant ≈ 2/3

Source: Enghin Atalay: http://ssc.wisc.edu/~eatalay/econ899_15/

slides_transformation.pdf

Grigsby Lecture 2 - Growth Facts January 16, 2017 6 / 14

Share of Labor in National Income Constant ≈ 2/3

Source: Enghin Atalay: http://ssc.wisc.edu/~eatalay/econ899_15/

slides_transformation.pdf

Grigsby Lecture 2 - Growth Facts January 16, 2017 6 / 14

Return on Capital Roughly Constant

Source: Karthik Nagarajan

Grigsby Lecture 2 - Growth Facts January 16, 2017 7 / 14

Different Countries Grow at Different Rates

Source: Karthik NagarajanGrigsby Lecture 2 - Growth Facts January 16, 2017 8 / 14

One more: Convergence Among Rich Countries

Grigsby Lecture 2 - Growth Facts January 16, 2017 9 / 14

Convergence Systematic

Countries U.S. States

Source: Barro

Grigsby Lecture 2 - Growth Facts January 16, 2017 10 / 14

But Convergence is Not A Law

Grigsby Lecture 2 - Growth Facts January 16, 2017 11 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Major questions of growth

1 Why do some countries grow so much faster than others?

2 Why has growth been such a constant? What set it off? Will itcontinue forever?

3 Will poor countries converge to rich ones? Why?

4 What “causes” growth?

Only recently getting study:

1 Is growth inclusive?

2 What is the role of institutions/government?

3 Does growth “diffuse” across space?

Grigsby Lecture 2 - Growth Facts January 16, 2017 12 / 14

Tools at our disposal

1 Solow growth model (today)

2 Neoclassical growth model (Thursday + Next Week)

3 Modern Growth Theory (next Thursday)

Grigsby Lecture 2 - Growth Facts January 16, 2017 13 / 14

Key Input to Solow Growth: Savings rate

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14

Jones and Romer (2010) - New Kaldor Facts

1 Increases in the extent of the market from increased flow ofgoods/ideas/finance/people

2 Accelerating growth (over the very long run) from virtually zeroseveral hundred years ago

3 The variation in modern growth rate increases in the distance fromthe technology frontier

4 Large income and Total Factor Productivity (TFP) differences:Differences in measured inputs explain less than half of cross-countrydifferences in GDP

5 Human capital per worker dramatically rising throughout the world

6 Long-run stability of skill premium

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14

Jones and Romer (2010) - New Kaldor Facts

1 Increases in the extent of the market from increased flow ofgoods/ideas/finance/people

2 Accelerating growth (over the very long run) from virtually zeroseveral hundred years ago

3 The variation in modern growth rate increases in the distance fromthe technology frontier

4 Large income and Total Factor Productivity (TFP) differences:Differences in measured inputs explain less than half of cross-countrydifferences in GDP

5 Human capital per worker dramatically rising throughout the world

6 Long-run stability of skill premium

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14

Jones and Romer (2010) - New Kaldor Facts

1 Increases in the extent of the market from increased flow ofgoods/ideas/finance/people

2 Accelerating growth (over the very long run) from virtually zeroseveral hundred years ago

3 The variation in modern growth rate increases in the distance fromthe technology frontier

4 Large income and Total Factor Productivity (TFP) differences:Differences in measured inputs explain less than half of cross-countrydifferences in GDP

5 Human capital per worker dramatically rising throughout the world

6 Long-run stability of skill premium

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14

Jones and Romer (2010) - New Kaldor Facts

1 Increases in the extent of the market from increased flow ofgoods/ideas/finance/people

2 Accelerating growth (over the very long run) from virtually zeroseveral hundred years ago

3 The variation in modern growth rate increases in the distance fromthe technology frontier

4 Large income and Total Factor Productivity (TFP) differences:Differences in measured inputs explain less than half of cross-countrydifferences in GDP

5 Human capital per worker dramatically rising throughout the world

6 Long-run stability of skill premium

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14

Jones and Romer (2010) - New Kaldor Facts

1 Increases in the extent of the market from increased flow ofgoods/ideas/finance/people

2 Accelerating growth (over the very long run) from virtually zeroseveral hundred years ago

3 The variation in modern growth rate increases in the distance fromthe technology frontier

4 Large income and Total Factor Productivity (TFP) differences:Differences in measured inputs explain less than half of cross-countrydifferences in GDP

5 Human capital per worker dramatically rising throughout the world

6 Long-run stability of skill premium

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14

Jones and Romer (2010) - New Kaldor Facts

1 Increases in the extent of the market from increased flow ofgoods/ideas/finance/people

2 Accelerating growth (over the very long run) from virtually zeroseveral hundred years ago

3 The variation in modern growth rate increases in the distance fromthe technology frontier

4 Large income and Total Factor Productivity (TFP) differences:Differences in measured inputs explain less than half of cross-countrydifferences in GDP

5 Human capital per worker dramatically rising throughout the world

6 Long-run stability of skill premium

Grigsby Lecture 2 - Growth Facts January 16, 2017 14 / 14