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Growth accounting

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Growth accounting (log Yt - log Yt-1) = (log At - log At-1) ... Basic growth accounting * Business sector. Main points: ... 'Wedge' accounting. Basic idea: ... – PowerPoint PPT presentation

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Title: Growth accounting


1
Growth accounting
  • Recall
  • Yt At Kta Lt (1-a)
  • Take logs
  • log Yt log At a log Kt (1-a) log Lt
  • Also true for t-1
  • log Yt-1 log At-1 a log Kt-1 (1-a) log Lt-1

2
Growth accounting
  • (log Yt - log Yt-1) (log At - log At-1)
  • a (log Kt -log Kt-1) (1-a)(log Lt -
    log Lt-1)
  • ? Yt ? At a ? Kt (1-a)? Lt
  • Rearrange to get
  • ? At ? Yt - a ? Kt - (1-a)? Lt

3
Growth accounting
  • We have data on Y, K and L
  • (1-a) labours share of income
  • wL/Y
  • ? 0.6 (on average)
  • Thus a ? 0.4
  • A is the Solow residual

4
Labour input
  • Labour input measured by total hours worked (L)
  • L average workweek ? employment

5
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6
Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting Basic growth accounting
Y Y K Labor input Labor input Labor input Labor input TFP TFP
WW Empl. WW Empl.
1960-73 4.3 4.6 0.7 -0.5 0.1 -0.5 -0.2 4.3 4.8
1973-95 4.1 4.6 2.7 -0.6 0.8 -0.6 0.8 3.2 3.7
1973-80 4.6 4.6 3.0 -1.1 1.1 -1.1 0.7 3.6 4.0
1980-95 3.9 4.6 2.5 -0.4 0.7 -0.4 0.8 3.0 3.6
1995-00 9.4 10.2 4.9 -1.6 5.6 -1.6 6.1 5.2 5.6
Business sector
7
Main points
  • Irelands TFP growth slowed between 1973-1995,
    but picked up post-1995
  • Investment also picked up post-1995
  • Especially impressive boom in employment
  • Probably even bigger contribution from labour
    input if labour quality adjusted.

8
Labour demand
  • Competitive wages (w/A)
  • Foreign multinationals using Ireland as an export
    platform
  • EU internal market
  • Low corporation tax
  • Highly educated, English-speaking workforce
  • Flexible labour markets
  • IDA policy agglomeration effects
  • Expanding services sectors
  • Boom in construction industry

9
Labour supply
  • Natural demographic effects
  • Figures 1, 2 3 in Fitz Gerald (2004)
  • Low dependency ratio
  • Total fertility rate 2! (EU average 1.5)
  • Participation rates
  • Migration

10
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11
Labour supply
  • National Competitiveness Council, Annual
    Competitiveness Report 2005
  • http//www.forfas.ie/ncc/reports/ncc_annual_05/ch0
    3/ch03_01.html
  • Central Statistic Office
  • http//www.cso.ie

12
Wedge accounting
  • Ahearne, Kydland, Wynne, (2005) Irelands Great
    Depression
  • Ireland experienced a great depression in the
    1980s
  • Study the contribution of different wedges to the
    downturn and subsequent recovery

13
Model economy
  • Computer model of the Irish economy
  • Explicitly model behaviour of agents
  • Households make choices about how much to
    consume/save and how much to work
  • Firms maximize profits
  • Agents are forward looking

14
Wedge accounting
  • Basic idea
  • Examine movements in wedges or distortions to
    account for cyclical episodes
  • Applications
  • Accounting for the (US) Great Depression
  • Accounting for 1990-91 (US) recession

15
Definitions
  • Efficiency wedge
  • Essentially TFP
  • Labor wedge
  • Distorts (intratemporal) labor-consumption
    decision
  • Investment wedge
  • Distorts (intertemporal) investment decision
  • Government consumption wedge

16
Efficiency wedge
17
Labor wedge
18
Capital wedge
19
Government consumption wedge
  • Unproductive government spending
  • Resource constraint
  • Yt Ct It Gt Xt - Mt

20
Results
  • Efficiency wedge by itself does a good job
    accounting for downturn and recovery, though
    predicts an earlier recovery
  • Labour wedge predicts an even more severe
    downturn, but no recovery
  • Investment and government wedges cannot account
    for downturn and recovery

21
Convergence or Regional Boom?
  • Barry (2002)
  • Rapid growth in 1990s was a regional boom
  • Region ? very open labour markets
  • If good shock hits region ? boom
  • Irelands case FDI
  • Bad shocks can lead to a reversal!
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