Question

QUESTION 3 = (MARKS: 25) According to the growth accounting equation, ?? = ?? + ??? + (1 − ?)?ℎ where??,?? ??? ?ℎ, are growth rates of GDP per capita, capital per worker, and human capital per worker, and α is the share of capital income in total GDP.

gy	gk	gh	α	Growth attributable to Physical capital	Growth attributable to Human capital	TFP growth	TFP share in growth
5.2	4.0	2.0	0.3
5.2	4.0	3.0	0.3
5.2	4.0	2.0	0.4

Q.3.1 Fill in the fifth column of the table with the growth attributed to physical. {4.5 Marks}

Q.3.2 Fill in the sixth column of the Table with human capital accumulation. {4.5 Marks}

Q.3.3 Fill in the seventh column of the Table with TFP growth. {4.5 Marks}

Q.3.4 Fill in the final column of the table by calculating the fraction of overall growth (gy) that is attributed to TFP by the growth accounting framework. {4.5 Marks}

Q.3.5 Using your calculations above discuss the potential for inaccurate estimates of gh and α to render misleading estimates of the importance of TFP growth. {7 Marks}

Answer 1

gy = gA + agk + (1-a)gh

gy - growth in GDP

gA - growth in TFP (total factor productivity)

gk - growth in capital

gh - growth in human capital

B	C	D	E	F	G	H	F/B	G/B	H	H/B
gy	gk	gh	a	agk	(1-a)gh	gA	growth physical capital	growth human capital	TFP growth	TFP share in growth
5.2	4	2	0.3	1.2	1.4	2.6	0.23	0.27	2.6	0.50
5.2	4	3	0.3	1.2	2.1	1.9	0.23	0.40	1.9	0.37
5.2	4	2	0.4	1.6	1.2	2.4	0.31	0.23	2.4	0.46

Growth in GDP is majorly because of growth in TFP. So, technology is very important if the economy wants to grow in long run. This can be seen from last column, Share of TFP in GDP growth is 50%,37%,43%.