# Chap 12 - Determinants of GDP and growth in GDP

```Chap 12 – measuring growth in GDP and
determinants of GDP
•Measuring growth in GDP
•The production function, it’s properties and the
measure of productivity
•Determinants of productivity
•Economic growth, it’s determinants and public
policy
1
I. Measuring growth in GDP
Compounding refers to the
growth rate from the year (t – 1) to the year t is measured as,
g=
where Yt represents output at time t. Equation can be written as
Assuming g to be constant over all years, starting from an initial
year 0, after T years, output becomes,
Even if g and Y0 are small, YT can become very large if
2
.
The Variety of Growth Experiences
Country
Period
Real GDP per
Real GDP per
Person at
Person at End
Beginning of Period of Period
Growth Rate
(per year)
Japan
1890-1997
\$1,196
\$23,400
2.82%
Brazil
1900-1990
619
6,240
2.41
Mexico
1900-1997
922
8,120
2.27
Germany
1870-1997
1,738
21,300
1.99
1870-1997
1,890
21,860
1,95
China
1900-1997
570
3,570
1.91
Argentina
1900-1997
1,824
9,950
1.76
United States
1870-1997
3,188
28,740
1.75
Indonesia
1900-1997
708
3,450
1.65
United Kingdom
1870-1997
3,826
20,520
1.33
India
1900-1997
537
1,950
1.34
Pakistan
1900-1997
587
1,590
1.03
1900-1997
495
1,050
0.78
3
Figures in column 5 are calculated as follows:
for Japan, 23,400 = 1,196 (1 + g)107. The solution of g for this
equation is 2.82%.
Growth rates are not usually
Doubling time of the level of output
According to the rule of 70, if some variable grows at a rate of x
percent per year, then that variable doubles in approximately 70/x
years.
\$5,000 invested at 7 percent interest per year, will double in size in
10 years, because 70/7 = 10
4
II and III. The Production Function, its properties and the
determinants of productivity
Y = A F(L, K, H, N)
Y = quantity of output
A = available production technology
L = quantity of labor
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F( ) is a function that shows how the
inputs are combined.
5
productivity (more precisely labor productivity) is defined
as
Determinants of labor productivity:
1. Capital per worker
2. Human capital per worker
3. Natural resource per worker
4. Technology
6
The Production Function
•
A production function has
for any positive number x,
if,
xY = A F(xL, xK, xH, xN)
•
•
That is, a
output
Setting x = ,
of all inputs causes the amount of
.
Y/ L = A F(1, K/ L, H/ L, N/ L)
where, Y/L = output per worker, K/L = physical capital
per worker, H/L = human capital per worker, N/L =
natural resources per worker
7
IV. Economic growth, it’s determinants and public policy
Determinants:
1. domestic savings and investment
To increase physical capital stock for the future, society must
role of financial markets: financial markets bring together
diminishing returns (catch-up effect) and limits on growth
all factors of production, in particular capital is subject to
Geometrically, the production function in the per worker form
8
2. foreign investment
foreign direct investment
foreign portfolio investment
effect on GDP and growth
3. education or investment on human capital
Human capital generates
a
.
. Hence brain drain creates
Public policies subsidizing education
9
4. Health and nutrition
5. property rights and political stability