Models of long-run growth

GDP p.c.

GDP per capita = output per worker = GDP/POPULATION

3 main ways to calculate GDP

• Expenditure - sum of final uses of goods and services: Y = C + I + G + NX

• Income - sum of incomes accruing to FoP: Y = wL + rK + rents

• Production approach - sum, across all sectors of output multiplied by prices: Y=\Sigma_{\forall i}P_{i},\cdot Q_{i}

Limits of GDP

Includes some questionable things - military spending

Excludes important things - health, environment

Can be manipulated e.g. Martinez 2022

Deflators

To compare GDP p.c. in a given place in a given year to a different place/same year or same place/different year/ OR both

Use CPI - for within country comparisons - tracks changes in price levels from large ‘basket’ incl. food, clothes, housing etc., takes large sample of prices for these items and resulting index allows us to go from nominal GDP to real GDP BUT quality changes/new options not always picked up properly, and choice of bundle/weights doesn’t reflect everyone’s consumption

Purchasing power parity - for cross-country comparisons - equalises how much currencies can buy in a given year using info on relative prices, observed relative prices reflect actual purchasing power

Growth accounting

Growth in Y is decomposed into growth in K and L, PLUS a residual (unexplained term) A - which refers to changes in total factor productivity - efficiency, tech progress etc.

Derived from a standard Cobb-Douglas production function

Y=AK^{\alpha}L^{1-\alpha}

Allows us to see how much of observed increase in output is driven by increases in inputs

Malthusian model

Used to make sense of the pre-industrial economy - model includes: an economy consisting of land and labour, land is fixed and experiences diminishing returns to labour, positive checks (war, disease) preventive checks (fertility)

Temporary rise in Y - increases population - diminishing returns to labour - incomes fall to original level

BUT he failed - because he assumed incomes are entirely ‘eaten’ away, assumed income increase always produces more children (parents investing in quality over quantity now), assumed intermittent income increases but some tech change is sustained continuously

Smithian growth

MAIN IDEA: Division of labour - specialisation as key to growth - enables larger-scale production and in turn innovation

Can think of this as growth in the A term from the production function - as it allows existing factors K and L to be used more productively,

Lewis Model

Dual-sector model of developing economies

Agriculture (uses land and labour to produce food at subsistence wages w/ diminishing returns to L) vs industrial (uses capital and labour paying market wages)

Labour can move between sectors freely - industry then profits from using low-cost surplus labour from agriculture, which it reinvests to accumulate capital - increase labour productivity - ECONOMIC GROWTH