Rashid on Growth and Miracles discusses several concepts related to measuring economic growth: - It questions whether the economy has a production function in the same way as individual firms, due to the "fallacy of composition". - It examines the concept of total factor productivity (TFP) and how extra production isn't always due to growth in inputs. - However, it notes TFP may not be a robust measure of efficiency and growth, and cites sources questioning the measurements of efficiency growth in East Asia. - Overall it suggests economic theory is not ready to directly inform policy, quoting Ronald Coase's criticism of expressing silly ideas mathematically in economics.

1. Rashid on Growth and
Miracles
Gaurav Sukhija, IITGN
March 13, 2014

2. Administrative Issues
• Office address: Room 305, Shed 5
• Collect papers between 12 pm - 2 pm
• Logistical issues. Quizzes delayed.

3. • Solow’s framework
How do we measure
economic growth?

4. The fallacy of
composition
• What is true of the parts is true of the whole
• Examples:
• Farmer with bumper crop
• Keynes’ paradox of thrift

5. The neoclassical
production function
• Sure individual firms have a production
function
• Does this imply that the economy has a
production function?
• Non-trivial because of the fallacy of
composition -- Cambridge critique

6. Total Factor
Productivity
• Suppose we own a farm
• 10 workers in year 1 and we produce 100
units of a crop
• In year 2, we still have 10 workers, but how
much do we produce?

7. Total Factor
Productivity
• The extra production isn’t due to growth
of inputs
• This is TFP

8. Units of TFP
• Y: Machines per year
• L: Man-hours per year
• K: Capital-hours per year
• A: ?

9. The pitfalls of TFP
Source: Rashid (2000) pp. 151

10. The pitfalls of TFP
• In short. Not a robust measure

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12. Krugman’s analysis of
East Asian growth
• Two claims:
• Real growth is achieved in a sustained
fashion only by efficiency growth
• The measured values of efficiency growth
in East Asia were negligible

13. Krugman’s analysis of
East Asian growth
• Two claims:
• Real growth is achieved in a sustained
fashion only by efficiency growth
• The measured values of efficiency growth
in East Asia were negligible
Okay
Debatable

14. Why is efficiency key?
• Can’t produce more with the same inputs
unless you’re more efficient
• This is a given

15. On TFP measurements
Source: Rashid (2000) pp. 152

16. On TFP measurements
Source: Rashid (2000) pp. 155

17. The theory isn’t ready
for policy

18. Ronald Coase (Nobel 1991)
• “In my youth it was said
that what was too silly
to be said may be sung.
In modern economics it
may be put into
mathematics.”