economic assignment due in 36 hours

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4.OverviewEc21282017.pptx
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Review

What are the three “wake up call” questions when you encounter a national product statistics for China?

Outline

I. National Product: Growth and Level

A. Measurement issues √

B. GDP growth & level

II. Structural Change

III. Productivity

IV. Human Development, Quality of Life

Readings: II.B

GDP growth & level lecture material: see Overview Tables file on course website

Outline

I. National Product: Growth and Level √

A. Measurement issues √

B. GDP growth & level √

II. Structural Change

III. Productivity

IV. Human Development, Quality of Life

Structural Change

Want to know not just whether the economy has grown, but whether growth has been accompanied by underlying changes in the economy associated with development

One important area of change: Economic Structure

Different aspects of economic structure: 

Production: GDP = Primary + Secondary + Tertiary

Expenditure: GDP = C + I + G + (EX - IM)

Employment: Primary/Secondary/Tertiary, Formal vs. Informal, Rural vs. Urban

Production Structure

In class: Structure of production

Some discussion of other aspects of structure in readings.

Additional research exists on other aspects of economic structure, e.g., *Perkins, “Rapid Growth and Changing Economic Structure: The Expenditure Side Story…,” China Economic Review, 2010.

Changes in Production Structure during Econ Development

Most countries follow a similar pattern

Early/First Stage: Industrialization

IND sector leads growth, its share increases

AG share declines

S no clear pattern

Late(r)/Second Stage: Service Economy

S share increases, surpassing IND share

AG share continues to decline

Note: Sectors with shrinking shares still grow in absolute terms

China’s Production Structure: Measurement Issues

Standard approach: Calculate value added by sector, divide by GDP: % of GDP produced by sector

NMP vs. GDP: Give different sectoral shares

GDP revisions following censuses: Big impact on sectoral shares

To look at trends in sectoral shares, should use constant prices

Prices & Sectoral Shares

See Naughton, ch. 6, pp. 11-14.

In Maoist era, IND products overpriced relative to AG and S

IND sector share looked big (overstated)

AG, S sector shares looked small (understated)

Since 1978, price distortions gradually eliminated

Falling relative prices for IND products

Rising relative prices for AG and S products

If use recent prices, sector shares are more reasonable

Trends over time: should be calculated with constant prices

Rapid growth in IND has been offset by falling prices; vice versa for AG

So, makes it look like there has been less structural change than is really so

China’s Production Structure: Trends

Long Term Trends in China’s GDP Structure, 1955-2012 (Based on NBS official GDP data; constant 1990 prices)

Source: Wu 2014, Table F-7

Trends in China’s GDP structure, 1978-2014 (Based on official NBS GDP statistics, converted to constant 2004 prices using the implicit deflators; Naughton Ch6, p12)

Trends: Conclusions

GDP structure in China has undergone marked structural change

Early 1950s: Agrarian economy

Maoist Era: Industrialization

Reform Era

Share of AG continues to decline

Share of Services has grown

Share of Industry has also grown

Where does that leave China now?

China’s Production Structure with Int’l Comparisons, 2014 (%) World Bank WDI, 2012, accessed Sep 26, 2016. Current prices.

Current Structure: Conclusions

China has to some degree followed the usual pattern

AG share is small (<10%)

Share of IND and S are similar (40-50%)

BUT: China’s economic structure is still unusual

IND share is enlarged

Mostly due to enlarged manufacturing share

S share is relatively small

Why?

Why the unusual structure?

Historical legacy from Maoist era

S low priority sector in the planned economy, did not receive much investment or resources

Ongoing institutions & policies

State policies still emphasize IND

Financial system supports high investment in fixed capital

S businesses continue to

Not to be supported by policies and institutions

Have less access to loans and investment funds

Tend to be small, informal, less capital intensive

Since 1990s IND growth boosted by China’s entry into world markets

More recently: Boom in construction (housing, infrastructure)

May also be due to measurement problems for S

Consequences: Was China’s growth efficient?

Outline

I. National Product: Growth and Level √

A. Measurement issues √

B. GDP growth & level √

II. Structural Change √

III. Productivity

IV. Human Development, Quality of Life

Productivity

In evaluating economic performance, care not just about growth, but about the sources of that growth

Does growth reflect increased productivity?

If so, can grow without increasing inputs (intensive growth)

If not, then growth requires more and more inputs of K and L (extensive growth)

Sources of Productivity Growth

What are some sources of productivity growth?

Sources of Productivity Growth

Technical change

Adopting better, existing technologies

Innovation: developing new technologies

Improved allocative efficiency

Movement of resources from lower return activities to higher return activities

Improved institutions: financial, legal, etc., that provide incentives and facilitate allocative efficiency

Human capital investment (maybe an input)

Measures of Productivity

Partial measures:

Q/L = output per unit labor

Q/K = output per unit capital

Full measure: Total Factor Productivity (TFP)

TFP = output divided by sum of all inputs

TFP Growth: Measurement

Begin with a production function

Q = A F(L,K)

Q is output

A is a productivity parameter

K is capital input

L is labor input

Graph of Productivity Increase

Q0 Q = A0F(K0,L)

I

L0 L

Productivity change occurs when A increases

A increases from A0 to A1

Can produce more output with the same inputs

Graph of Productivity Increase

Q = A1F(K0,L)

Q1

Q0 Q = A0F(K0,L)

I

L0 L

TFP Growth: Measurement

From the production function Q = A F(L,K)

We know that growth in Q is a function of growth in A, L and K

gQ = gA F(gL , gK)

gA is growth in total factor productivity (TFP)

F(gL , gK) is growth in output due to growth in inputs

TFP Growth: Measurement

If production function satisfies certain conditions (e.g., Cobb Douglas), growth relationship can be written as

gQ = gA + αgL + βgK

From this, we get:

gA = gQ – αgL – βgK = TFP growth

TFP growth (gA) = gQ – αgL – βgK

Growth in TFP = growth in GDP minus a weighted sum of growth in L and K

Usual application:

Find data for GDP, L and K

Calculate their growth rates (gQ , gL , gK)

Find some values for α and β

Note: α and β are elasticities

E.g., 1% growth in L will cause α% growth in Q

Then: calculate gA as a residual

TFP example

TFP equation: gA = gQ – αgL – βgK

Values of variables:

Annual GDP growth = 10%

Annual labor input growth = 2%

Annual capital input growth (I/K) = 12%

α = 0.6 and β = 0.4

What is TFP growth?

gA = .10 – .6*.02 – .4*.12 = .04

TFP growth is 4%

TFP example, cont.

How much of GDP growth is due to growth in TFP vs. growth in inputs?

Due to TFP growth

gA/gQ = .04/.10 = .40 (40%)

Due to L growth

αgL/gQ = (.6*.02)/.10 = .12 (12%)

Due to K growth

βgK/gQ = (.4*.12)/.10 = .48 (48%)

TFP: another example

TFP equation: gA = gQ – αgL – βgK

Values of variables:

GDP growth = 5%

Labor growth = 1%

Capital stock growth (I/K) = 9%

α = 0.5, and β = 0.5

What is TFP growth (gA)?

How much of GDP growth is due to TFP growth? L growth? K growth?

Answer: TFP growth is -1%

31

gA = gQ – αgL – βgK

Some measurement issues:

Measuring growth in output (GDP)

Measuring growth in inputs (L and K)

L: should be hours but usually is number of workers

What about education/human capital?

Separate input? Or, just counted as part of the residual gA?

K: Growth in K is I/K

Not hard to get data on I

Very difficult to estimate K, value of existing K stock

What values to use for α and β?

Can estimate using regression and data for Q, L and K

Make a reasonable guess

Estimates of TFP Growth for China

Different researchers use different approaches to resolving these measurement problems

Depending on approach, will obtain different estimates of productivity growth

I will show you some different estimates, so you will see the range

Note: Sources of TFP estimates presented in class:

Holz (2006) “Measuring Productivity Growth...”

Wu (2014) “China’s Growth and Productivity…”

Perkins & Rawski (2008), reported in Naughton, ch6

Notes to previous slide:

Top table is from Holz (2006), tables 31 and 32. TFP growth is calculated by weighting employment growth by 0.58 from 1953‐78 and 0.60 from 1978‐2005, and capital growth by 0.42 and 0.40, respectively. Does not incorporate changes in human capital.

Bottom table is from Wu (2014), table 13. Weights are based on input‐ output tables and change over time, for labor from about 0.6 in the 1950s to 0.4 in the 2000s (capital the opposite). Wu incorporates changes in human capital.

Both Holz and Wu use their own estimates of GDP growth, not the official NBS numbers.

Perkins and Rawski use official GDP data but an alternate GDP deflator approach and constant 2000 prices. They also use an alternate series for capital stock and adjust labor for changes in human capital. They do not explain their choice of weights, but it appears that they use K/L weights of 4.3/5.7 for 1952‐78 and 4.4/5.6 for 1978‐2005.

Summary of China TFP Growth

1950s-1970s: Negative or very slow TFP growth.

1980s-2005/08: Positive TFP growth, but estimates vary

Most studies: 3‐4%

Wu’s estimate: about 1%

mainly due to his lower alternative estimate of GDP growth

also due to his higher estimate of growth in K

Summary of China TFP Growth, cont.

1950s-1970s: Growth mainly through investment but also some due to L growth

K growth contributes ≈ 80%

L growth contributes ≈ 25%

TFP growth: contribution is small or negative

1980s-2005/08: Investment still important, but (maybe) productivity increases, too

K growth contributes 45-70% (Wu)

L growth contributes 10-15%

TFP growth contributes 15% (Wu) to 40%

What about other countries? How does China Compare?

Country Period Output Growth TFP Growth (incl. human K)
China1 1978-05/08 7-10% 1.1-4.1%
India2 1978-04 5.4 1.6
East Asia2 1960-80 7.0 1.2
East Asia2 1980-03 6.1 0.9
U.S. 3 1950-92 3.2 1.1
Japan3 1960-93 5.5 2.0
Rep. of Korea3 1960-93 8.6 2.1

Sources:

1. Holz, Perkins & Rawski, Wu.

Bosworth and Collins (2007). Their estimates for China, which take into account

human capital, show TFP growth of 3.8% for 1978-2004.

3. World Bank, China 2020: Development Challenges in the New Century, p. 5.

China’s Productivity Growth in International Perspective

TFP growth of 1 to 2% is respectable by int’l standards

1950s-1970s: China’s TFP performance was poor by int’l standards

1980s-2000s: China’s TFP performance was respectable or good by int’l standards

China’s Economic Performance: Summary

1. China achieved respectable or high rates of growth in nat'l product, depending on the period

2. Substantial structural change, altho’ somewhat distorted in favour of industry, especially before the reforms

3. Slow productivity growth until the reform period; positive productivity growth since—views vary on how positive.

Outline

I. National Product: Growth and Level √

A. Measurement issues √

B. GDP growth & level √

II. Structural Change √

III. Productivity √

IV. Human Development, Quality of Life

Agriculture

Industry

Total Manu.

Services

CHINA

9

43

30

48

Low income (2010)

31

21

8

48

lower middle upper middle

16 7

31 36

16 21

52 57

High income (2010)

1

25

15

74

Agriculture

Industry

Total Manu.

Services

CHINA

9

43

30

48

Low income (2010)

31

21

8

48

lower middle

upper middle

16

7

31

36

16

21

52

57

High income (2010)

1

25

15

74

Agriculture

Industry

Total Manu.

Services

CHINA

9

43

30

48

Low income (2010)

31

21

8

48

lower middle

upper middle

16

7

31

36

16

21

52

57

High income (2010)

1

25

15

74

Holz Estimates

Period

Output

Growth

Contributions of Inputs

(input growth multiplied by

weights)

TFP

Growth

Capital

Labor

1953-78

6.1

5.1

1.6

-0.6

1978-05

9.7

4.6

1.0

4.1

Wu Estimates

Period

Output Growth

Contributions of Inputs (input growth multiplied by

weights)

TFP Growth

Capital

Labor

Human Capital

1952-78

4.3 3.3 1.0 0.5

-0.5

1978-08

7.2 5.2 0.2 0.5

1.1

Perkins and Rawski Estimates

Period

Output Growth

Contributions of Inputs (input growth multiplied by

weights)

TFP Growth

Capital

Labor

1953-78

4.4

2.5

1.4

0.5

1978-05

9.5

4.2

1.5

3.8

Holz Estimates

Period

Output Growth

Contributions of Inputs

(input growth multiplied by weights)

TFP Growth

Capital

Labor

1953-78

6.1

5.1

1.6

-0.6

1978-05

9.7

4.6

1.0

4.1

Wu Estimates

Period

Output Growth

Contributions of Inputs

(input growth multiplied by weights)

TFP Growth

Capital

Labor

Human Capital

1952-78

4.3

3.3

1.0

0.5

-0.5

1978-08

7.2

5.2

0.2

0.5

1.1

Perkins and Rawski Estimates

Period

Output Growth

Contributions of Inputs

(input growth multiplied by weights)

TFP Growth

Capital

Labor

1953-78

4.4

2.5

1.4

0.5

1978-05

9.5

4.2

1.5

3.8