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.
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.