1 MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT Total Factor Productivity, Human Capital, and Technology Copyright © 2005 John Wiley & Sons, Inc.

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MACROECONOMICSAND THE GLOBAL BUSINESS ENVIRONMENT

Total Factor Productivity, Human Capital, and Technology

Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. PowerPoint by Beth IngramUniversity of Iowa

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Key Concepts

Total Factor Productivity Human Capital Technological Progress Foreign Direct Investment

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Capital

Rea

l GD

P

Effect of shift in production function

K0K1

Production Function, Old

Production Function, New

Investment, Old

Investment, New

Depreciation

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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?

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Human Capital

Skills and knowledge that accumulate over time, embodied in people

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Human Capital

GDP per capita =

GDP Hours Number Employed Labor Force

Hours Number Employed Labor Force Population

Human Capital increases Labor Productivity

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Capital

Rea

l GD

P

More human capital

KLowKHigh

Output, Low Human Capital

Output, High Human Capital

Investment, Low

Investment, High

Depreciation

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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

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Contribution to Growth

Contribution of Education to Annual Output Growth, 1950 – 1990

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How to increase human capital?

Educational attainment Expenditures on education

Allocation of resources Level of education Cost of education

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Schooling Differences Across Countries

Average Years of Schooling

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Percentage of students completing the final year of primary school

Source: World Bank Millennium Development Goals

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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

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Institutions

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

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World Bank Indicators

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

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Political Stability

Congo, Dem. Rep. (Zaire)

LIBERIA

AFGHANISTAN

IVORY COAST

BURUNDI

SOMALIA

SUDAN

GEORGIA

CENTRAL AFRICAN REPUBLIC

COLOMBIA

NEW ZEALAND

NETHERLANDS

SWEDEN

PORTUGAL

NORWAY

MALTA

LUXEMBOURG

ICELAND

SWITZERLAND

FINLAND

Bottom 10 Top 10

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Corruption

Congo, Dem. Rep. (Zaire)

LIBERIA

SOMALIA

IRAQ

MYANMAR

CAMBODIA

TURKMENISTAN

TAJIKISTAN

CAMEROON

ANGOLA

ICELAND

NORWAY

NETHERLANDS

CANADA

SINGAPORE

NEW ZEALAND

SWEDEN

FINLAND

DENMARK

SWITZERLAND

Bottom 10 Top 10

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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

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R & D

Growth can be sustained through technological progress

Role of Research and Development in promoting technological progress

Example of South Korea

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South Korean R&D as a percentage of GDP

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0

200

400

600

800

0 5000 10000 15000 20000 25000 30000 35000

GDP per Capita, 1997

R&

D p

er C

apit

a, 1

997

Rich countries spend more on R&D

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Foreign Direct Investment

Investment by foreign firms in an economy Encourages capital accumulation and

technology transfer Can facilitate convergence among countries

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Foreign Direct Investment (FDI)

Net Foreign Direct Investment, (billions of US $)

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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

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IT Industry share of GDP (%), 1990s

Source: OECD Economic Outlook, June 2000

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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

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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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