Growth and the Asian

Experience
CHAPTER 3
 Introduction

Components of Income and

Output

OUTLINE: Total Factor Productivity

Growth theories
Introduction

Why do economies
grow?
Why should they
grow?
Why do we want
them to grow faster?

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 1. Components of
Income and
Output
Output is derived by Standard production
combining various function is an equation that
factors of production, expresses the relationship
which include land, between the quantities of
capital, and labor. productive factors (such as
labor and capital) used and
the amount of product
obtained.
 1. Components of
Income and
Output
 A production function relates the inputs of the
production process, such as labor (L) and the capital
(K), to the output/income (Y) from the process. This
relationship can be stated in a number of ways. A
general function (f) without any functional form can be
stated as:

Y= f (K, L)
2. Total Factor Productivity
 TFP is also called as multifactor productivity.
 TFP pertains to the efficiency with which the input are
combined to produce output. This efficiency called gains
can be due to the number of factors including:

• Greater economic of scale • Shifts in production from low productivity

• Better management activities to higher productivity activities
• Marketing and organizational with the same amount of labor and capital.
abilities • The impact of new technology which
enables greater output to be obtained with
the same capital or labor inputs.

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2. Total Factor Productivity

 If TFP, or multifactor productivity, term A, and a denote

capital and labor by K and L respectively, then the
production function can be written as:

Y= f (K, L, A)

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2. Total Factor Productivity

 In general expression. Economist assume that

competitive condition exist in capital and labor markets
and there are constant return to scale. Therefore, the
growth of income rates of the capital and labor inputs
weighted by their shares in national income:
g(Y)= g(K) W(K)+ g(L)+ A

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2. Total Factor Productivity

g(Y)= g(K) W(K)+ g(L) W(L)+ A

g(Y): growth rate of income
g(K): growth rate of capital
g(L): growth rate labor
W(K) and W(L): weighted shares of capital and labor

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EXAMPLE:
Suppose a country has a growth rate of income of
6 percent, a growth rate of capital (net of
depreciation) of 10 percent, and the capital’s shares
of income is 30 percent, labor’s shares is 70
percent and labor’s grows at 1 percent, then the
sum on the terms of the right-hand side, apart from
A will be?

Growth and the Asian Experience 10

ANSWER:
0.06= 0.3(0.10)+0.7(0.01)+A
0.06=0.03+0.007+A
0.06=0.037+A
A=0.037-0.06
A=0.023

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 GROWTH THEORIES
1. KEYNESIAN THEORY
2. SOLOW OR
NEOCLASSICAL
THEORY
3. POWER BALANCE
THEORY
4. STRUCTURAL THEORY
5. NEW GROWTH
THEORY
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KEYNESIAN THEORY
• These models stress the
accumulation of capital.
• It include Rostow’s (1960) stage of
growth model and the Harrod-
Domar growth model (see Harrod,
1939; and Domar,1946).
Growth and the Asian Experience
SOLOW OR NEOCLASSICAL
THEORY
• These models stress the neoclassical
economic principle that factors of
production should be paid the value of
their marginal product.
• These models show a convergence in
growth among countries and also
imply that there isa a slowdown in
growth in the absence of technical
progress as a result of diminishing
return.
• The law of diminishing can operate
and there is mobility of factors to seek
their highest return.
• These models have all been developed
on the basis of the Solow-Swan
13
 POWER BALANCE THEORY
• These models stress international
power balance as an important factor
in development, including the terms
and patterns of trade which tend to
keep some countries poor while
other countries get richer.
• The international is considered as
subclass of the neoclassical model
where there is a lack of factor
mobility in international trade
NEW GROWTH THEORY
The most recent growth theories, simply called “new growth theories”
STRUCTURAL THEORY
• These models emphasize the shifts in
resources between different sectors on
the supply side.
• These theories discuss the transition
from labor-intensive agriculture,
which relies on traditional, low
productivity farming techniques, to
modern, high-productivity industries
which have benefited from innovation
and more intensive use of capital and
technology.

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Growth and the Asian Experience 15
Growth and the Asian Experience 16
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thank you