MACROECONOMICS

AND THE GLOBAL BUSINESS ENVIRONMENT

Total Factor Productivity, Human Capital,

and Technology

1
PowerPoint by Beth Ingram
University of Iowa Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.
Key Concepts
 Total Factor Productivity
 Human Capital
 Technological Progress
 Foreign Direct Investment
Effect of shift in production function

Production Function, New

Real GDP

Production Function, Old

Depreciation
Investment, New
Investment, Old

K0 K1
Capital
4

Production Function Shift

 Increase in Output due to function shift
 Increase in Labor
 Increase in TFP
 Increase in Output due to increase in capital
 Economy moves to new steady state
 As capital increases, output increases
 Why does production function shift?
5

Human Capital
 Skills and knowledge that accumulate over
time, embodied in people
6

Human Capital

GDP per capita =

GDP Hours Number Employed Labor Force

   
Hours Number Employed Labor Force Population

Human Capital increases Labor Productivity

More human capital

Output, High Human Capital

Real GDP

Output, Low Human Capital

Depreciation
Investment, High
Investment, Low

KLow KHigh
Capital
Human Capital
 Increase means more output, even at current
levels of physical capital and labor
 Increase means higher steady state level of
output and capital
 May explain cross-country growth differentials
Contribution to Growth

Contribution of Education to Annual Output Growth,

1950 – 1990
10

How to increase human capital?

 Educational attainment
 Expenditures on education
 Allocation of resources
 Level of education
 Cost of education
11

Schooling Differences Across

Countries
Average Years of Schooling
12

Percentage of students completing the

final year of primary school

Source: World Bank Millennium Development Goals

13

Review
 Cross-country differentials in per capita
output are substantial
 Role of physical capital
 Role of human capital
 Significant fraction of differential is
unexplained – we call this “TFP”
 Other elements of TFP
14

Institutions
 Property Rights
 Regulatory Institutions
 Macroeconomic Stabilization
 Social Insurance
 Conflict Management
 Political Rights
15

World Bank Indicators

 Voice and accountability
 Political stability and lack of violence
 Government effectiveness
 Regulation quality
 Rule of law
 Corruption
16

Political Stability
Bottom 10 Top 10

Congo, Dem. Rep. (Zaire) NEW ZEALAND

LIBERIA NETHERLANDS

AFGHANISTAN SWEDEN

IVORY COAST PORTUGAL

BURUNDI NORWAY

SOMALIA MALTA

SUDAN LUXEMBOURG

GEORGIA ICELAND

CENTRAL AFRICAN REPUBLIC SWITZERLAND

COLOMBIA FINLAND
17

Corruption
Bottom 10 Top 10

ICELAND
Congo, Dem. Rep. (Zaire)
NORWAY
LIBERIA
NETHERLANDS
SOMALIA

IRAQ CANADA

MYANMAR SINGAPORE

CAMBODIA NEW ZEALAND

TURKMENISTAN SWEDEN

TAJIKISTAN FINLAND

CAMEROON DENMARK

ANGOLA SWITZERLAND
18

Rent Seeking
 Activity in which value-added produced by
one person is taken by another
 Examples
 Water subsidies
 Sugar tariffs
 Insider contracts or trading
 Concerns
 Absorbs resources (labor and capital)
 Acts as a tax
 Rent seeking crowds out production
19

R&D
 Growth can be sustained through
technological progress
 Role of Research and Development in
promoting technological progress
 Example of South Korea
20

South Korean R&D as a percentage of

GDP
21

Rich countries spend more on R&D

800
R&D per Capita, 1997

600

400

200

0
0 5000 10000 15000 20000 25000 30000 35000
GDP per Capita, 1997
22

Foreign Direct Investment

 Investment by foreign firms in an economy
 Encourages capital accumulation and
technology transfer
 Can facilitate convergence among countries
23

Foreign Direct Investment (FDI)

Net Foreign Direct Investment, (billions of US $)

24

The New Economy

 Role of ICT
 Information and Communication Technology
(sometimes just IT)
 How does IT produce growth?
 Through capital accumulation
 TFP gains in adopting sectors
 TFP in sectors that produce IT
25

IT Industry share of GDP (%), 1990s

Source: OECD Economic Outlook, June 2000

26

Contribution of IT capital to US non-

farm business output

Source : Oliner and Sichel (2000) The resurgence of Growth in the late 1990s : Is IT
the story? Federal Reserve Board mimeo
27

Summary
 Effect of increases in TFP
 Effect of human capital accumulation
 Other influences on growth
 Institutions
 Technological Progress
 FDI
 IT capital accumulation

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