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 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 saw a recent Solow´s video where he claim for a masive migration of people in developing countries from rural areas to the cities, advocating for the need of a strong public investment on infraestructure to achieve this switch from agricultural to manufacturing society. I wonder, it make that sense? It is the only way to grow for developing countries to shift from agriculture (and explotation of natural resources, for extention I guess) to try to compete with China as manufacture country. I think Mr. Solow may be a little stick in the 60s, China industrias success may be not a good example of his production funtion but for a strict regulations of government plus a huge and highly speculative investments.
Many of the richest countries of the world (Luxemburg, Swiss, Norwegian) are small. May not small be beautiful?
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.
Subjective parts aside, isn't this a bit wrong? There is certainly public transportation in the U.S. There is certainly health care in the U.S.
Agree. For example, Japanese people (not taking into account regulations forbidding otherwise) might value much more shopping at the mom-and-pop store than at Wal-Mart's. GDP might capture that Kg. of noodles bought expensively at the mom-and-pop store and compare it to the 2 Kg. that can be bought at Wall-Mart and conclude that the USA is twice as rich as Japan. However, GDP may not have captured the increased value-experience of shopping in the mom-and-pop store in Kyoto.
However, we can't say for sure it is this way since Japanese are not allowed the choice of shopping at Wal-Mart due to government intervention.
Someone from the UK commenting on the quality of food in the US, too rich. Please go enjoy some donkey/horse meat lasagna. You could also look up the number of Michelin stars in the US versus the UK. No health care? Under that assumption the US must have a high mortality rate and their life expectancy must be really low. Finally from Wiki, "In the 2010 census, the largest Japanese American communities were found in California with 272,528, Hawaii with 185,502, New York with 37,780, Washington with 35,008, and Illinois with 17,542. I guess the Japanese don't concur.
But it´s like to discuss if wealth either make you happy or not, "social wealth" is a very subjective concept, GDP nor wealthy may not be a good measurement of happiness, but is a very concrete and easy to measure one. And in general, if you let people choose, they usually prefer to be wealthy tan poor, may them be "wrong" but the preference for wealthy is a fact and justifies the GDP as a measure.
I suppose the increase in GDP for 10x capital is 10^alpha i.e. only about 2 if alpha = 1/3. Not enough to explain on its own but that combined with a higher savings rate could go a long way. And with Mankiw's estimate of alpha = 0.6 it would go a lot further. If the main criticism of the high alpha estimate is the observation that capital does not move from rich countries to poor, isn't that also explained by higher depreciation rates in poor countries?
In short I am not yet convinced the Solow model cannot explain most of the difference in GDP between countries.