Why some are rich, others are poor – and what it means for future prosperity :: InvestMacro


by Amitarajet A. BattableAnd the Rochester Institute of Technology

Why are some countries rich and others poor? Can the governments of poor countries do something to ensure that their countries become rich? These kinds of questions have always fascinated government officials and economists, at least since Adam Smith, the eminent Scottish economist whose famous 1776 book was titled “An inquiry into the nature and causes of the wealth of nations. “

Economic growth is important to a country because it can raise living standards and Provides financial stability to its people. But getting the right recipe consistently has eluded states and economists for hundreds of years.

as such economics studying Regional, national and international economics, I believe understanding an economic term called total factor productivity can provide insight into how countries get rich.

growth theory

It is important to understand what helps a country develop its wealth. In 1956, MIT economist Robert Solow paper books Analyze how labor – known as labor – and capital – also known as physical items such as tools, machinery, and equipment – can be combined to produce goods and services that ultimately determine people’s standard of living. Solo later went on to win Nobel Prize for his work.

One way to increase the total quantity of goods or services in a country is to increase labor or capital or both. But this does not continue to grow indefinitely. At some point, adding more labor only means that the goods and services produced by these workers are divided among a greater number of workers. Hence, output per worker – which is one way of looking at the wealth of a nation – will tend to fall.


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Likewise, adding infinitely more capital like machinery or other equipment is also unhelpful, because those physical items tend to spoil or depreciate. The company will need frequent financial investments to counteract the negative impact of this wear and tear.

in Subsequent paper in 1957Solow used US data to show that ingredients, as well as labor and capital, are needed to make the nation richer.

He found that only 12.5% ​​of the observed increase in American production per worker—the amount of what each worker produced—from 1909 to 1949 can be attributed to increased worker productivity during this time period. This means that 87.5% of the observed increase in output per worker has been explained by something else.

Total factor productivity

Solow called this something else “technical change,” and it is known today as total factor productivity.

Total factor productivity It is the part of the goods and services produced that is not explained by the capital and labor used in production. For example, it may be technological developments that make it easier to produce goods.

Another way to understand total factor productivity.

It is best to think of total factor productivity as a recipe for how to combine capital and labor to obtain output. Specifically, its growth is like creating a cookie recipe to ensure the largest number of cookies – which also taste great – are produced. Sometimes this recipe gets better over time because, for example, cookies can be baked faster in a new type of oven or workers become more familiar with how to mix ingredients more efficiently.

Will total factor productivity continue to grow in the future?

Given how important total factor productivity is to economic growth, the question of the future of economic growth is essentially the same as asking whether total factor productivity will continue to grow—whether the recipes will always improve—over time.

Solow hypothesized that TFP would grow exponentially over time, a dynamic explained by economist Paul Romer, who He also won a Nobel Prize for his research in this field.

Romer argued in The 1986 paper is notable Investments in research and development that lead to the creation of new knowledge can be a major driver of economic growth.

This means that each previous bit of knowledge makes the next bit of knowledge more useful. In other words, knowledge has an indirect effect which results in more knowledge as it spreads.

Despite Romer’s efforts to provide a basis for the assumed exponential growth of TFP, research shows that productivity growth in the world’s advanced economies has fallen Since the late 1990s it is now at historically low levels. There are concerns that The COVID-19 crisis may worsen This negative trend further reduces the growth of total factor productivity.

Recent Research It shows that if the growth of total aggregate production declines, it could negatively affect living standards in the United States and other rich countries.

A very recent research paper by economist Thomas Philippon analyzes a large amount of data for 23 countries over a 129-year period, and finds that TFP In fact it does not grow exponentiallyas Solo and Rumer thought.

Instead, it grows in a linear and slower progression. Philippon’s analysis indicates that new ideas and new recipes do indeed add to the existing stock of knowledge, but do not have a ripple effect that earlier scholars believed.

Ultimately, this result means that economic growth has been too fast and is now slowing – but it’s still happening. The United States and other countries can expect to get richer over time but not as quickly as economists previously expected.Conversation

About the author:

Amitarajet A. BattableDistinguished Professor and Professor of Economics Arthur J. Gosnell, Rochester Institute of Technology

This article has been republished from Conversation Under a Creative Commons License. Read the original article.



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