The Solow Model 4 – Productivity
The failure of the Solow model to duplicate the growth data quantitatively leads us to look for differences across countries in productivity. Why do some countries
The failure of the Solow model to duplicate the growth data quantitatively leads us to look for differences across countries in productivity. Why do some countries get less output from the same level of inputs as do other countries? The first half of the video builds on the previous three Solow videos and includes some equations but keep going! The data on productivity differences across countries is dramatic and undestanding these differences is important for development.
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A quick question on the slide "Accounting for Productivity" - The table mentions the factors of production as k^(1/3)h^(2/3). Is that for hypothetical alpha of 1/3? In that case wouldn't the derived values of A vary for different values of alpha? How would A vary at Mankiw's alpha of 0.6?
Yes, you are correct that the derived values of A are for alpha=1/3. If we increased alpha this would give a larger role to capital but a smaller role to labor. Since most countries are close to US levels in human than in physical capital this would tend to mean that a higher alpha would result in more of the differences in output being explained by differences in factors of production and fewer explained by productivity differences. A good observation!
In the previous video you show differences in savings rates do not explain the difference in GDP. Then at the start of this video you say "Hard to explain large differences in GDP per capita based on only investment, depreciation, and population growth rates.". Are we taking the claim about depreciation on trust? Because I am not convinced of that part yet. What if one country has depreciation 1% per year and another has 10% per year. Given how badly property rights are enforced in many poor countries is this implausible? This gives the rich country 10x the steady rate of capital even with the same savings rate. What does that translate to in higher GDP?
I think the focus here on Japan's GDP is particularly telling that GDP is a poor measure of a social wealth. ie if you compare Japan and the USA on the one hand you have Japan, pleasant to live, communities, low crime, good food versus the USA which has high GDP but is kind of a hell hole to live in. No public transport, terrible food, no health care, high levels of crime.
If I had to choose between living in Japan or the US I'd go Japan every time.