Growth bookkeeping measures the donation of each of this three factors to the economy. Thus, a country’s expansion can be broken down by accounting for what percent of financial growth originates from capital, labor and also technology.
It has actually been shown, both theoretically and empirically, that technical progress is the key driver that long-run growth. The explanation is actually fairly straightforward. Holding various other input factors constant, the added output acquired when adding one extra unit input of funding or labor will eventually decline, according to the legislation of diminishing returns. As a result, a nation cannot maintain its long-run development by simply accumulating an ext capital or labor. Therefore, the driver of long-run development has come be technological progress.
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This article further investigates the relationship in between sources the past economic growth and also future performances, specifically the periods after the good Recession, among developed countries. We gathered data native the Conference Board’s complete Economy Database because that nine significant advanced economies1 indigenous 1990 to 2013 and also performed the adhering to growth accounting exercise:
For each country, every capita output expansion is first broken down right into the corresponding contributions from funding stock, labor inputs and technological advancements (represented by complete factor productivity, or TFP).2 Next, we division our sample into two periods: before and after the jae won crisis. This permits us to examine if motorists of growth relate come the financial performance of a country, especially during or after ~ the recession. Finally, us plot average gross domestic product (GDP) development after the financial crisis against the mean contribution to output development of labor, capital and TFP before 2007, as shown in the figures below.
The an outcome shows a positive correlation between past TFP and also future growth among developed economies. The correlation coefficient was close to 0.60. Namely, those countries whose growth was moved by TFP before the situation tended to have higher output development afterward. However, the relationships in between GDP expansion after the crisis and the donation to GDP from resources or labor were both negative. The correlation in between output growth and also labor to be -0.68 and also between output growth and also capital to be -0.30. The an adverse correlations indicate that countries with expansion driven by resources or labor accumulation are much less likely to execute well in the future, especially during economic downturns. Our straightforward exercise also implies the the health of an economy depends top top the source of development instead that the growth itself.
In enhancement to the function TFP plays in driving long-run growth, this an easy exercise mirrors that a nation with robust TFP-driven development prior come the great Recession had tendency to perform well loved one to other nations following the recession.
Notes and also References
1 The countries are Germany, Italy, France, the unified States, Japan, Australia, Canada, good Britain and Spain.
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2 The labor inputs room measured through the full labor hours adjusted by quality of job (human capital).