With the exception of the US (and maybe Canada and Germany), all of the countries in the G7 have pretty similar levels of GDP per capita. In constant price PPP terms, Japan, France, and the UK are all around 38,000 USD, while Italy is a bit lower at 34,000 USD (the Great Recession really hurt Italy, which has also been in a long term decline for a couple decades), and Germany and Canada are both about 44,000 USD.
This clustering in GDP per capita strikes me as a little bit strange, since employment-population ratios and average hours per employee vary drastically across countries. People in France work a lot fewer hours than their neighbors across the English channel for the same amount of output, while people in Japan work infamously long hours and seemingly get nothing out of it.
I guess I would expect labor productivity (GDP per hour worked) to be differ between countries a little bit, but it seems strange to me that unconditional convergence hasn't even held between western democracies. America seems to have some magical ability to be more productive than every country but France and Germany, and the UK is inexplicably much poorer than its European neighbors. Italy has understandably been a mess since the days of Silvio Berlusconi, but Japan's perennially low productivity does not match its reputation as a paragon of efficiency.
I also tried adjusting for the size of the capital stock in each country, with little success. First, I assumed output in each country of the G7 is produced with a typical neoclassical/Cobb-Douglas production function, i.e.
$$Y_t = A_t K_t^\alpha H_t^{1-\alpha}$$
where $Y_t$ is GDP, $A_t$ is total factor of productivity (TFP), $K_t$ is capital, and $H_t$ is total hours worked. Working with the somewhat unrealistic assumption that $\alpha$ (capital's share of output) is constant at $0.34$ for all of the G7, I calculated TFP by dividing $Y_t$ by $K_t^\alpha H_t^{1-\alpha}$[1]:
I didn't include Germany or Italy in the chart because they are mostly similar to France (Italy started falling to the level of the UK and Japan in the mid-nineties, though) and they crowded out the more interesting information. Looking at TFP instead of hourly output presents about as many questions as it answers. First, it becomes clear that Canada, France, and Germany are equally as productive, but that Canada and Germany do a much better job of ensuring full employment than France does (this isn't just a difference in hours either, Germans work fewer hours per year than French people). But why did Canada slow down relative to the US in the eighties? And what the heck is going on with Japan here?
My partiality to the UK makes me happy that at least Britain is better off than Japan (incidentally my second favorite country in the G7), but I'm a little bit skeptical that even two world wars and decolonization made the UK lose 40% of its productive capacity relative to the United States, especially when the end of French empire didn't have the same consequences. Also, everyone talks about Japan's lost decade starting with the recession in the late 1990s, but the decline seems to have actually begun in the seventies, and the cause completely evades me.
Whenever I read about growth/development economics, it's usually taken for granted that America is at the technological frontier and that explains its unusually high productivity, but Canada's relative smallness looks like the only thing that could prevent us from giving it that title, at least from 1950 to 1980.
Unfortunately most of the growth/development economics research I encounter doesn't really care about 30% gaps between rich countries, but instead (and probably rightfully so) focuses on the 90% gaps between rich countries and poor ones -- heck, I'm looking into those gaps in Vietnam, Cambodia, Laos, and China for my school's version of a senior thesis. Maybe there is no real good explanation for why Japan or Britain haven't converged to America's level of GDP per capita in the 70 years since World War II, or why Canada has been losing ground for the last 30 years. It just really, really bothers me that there isn't.
[1] All the data I used comes from the Penn World Tables. Capital is the capital stock at constant national prices, GDP is GDP at constant national prices (I would use PPPs, but capital is only available at constant national prices and current PPPs, and the data seem to match World Bank's idea of constant PPPs in that they are at PPP for the base year), and Hours is the product of average hours worked per person engaged and total persons engaged.
This clustering in GDP per capita strikes me as a little bit strange, since employment-population ratios and average hours per employee vary drastically across countries. People in France work a lot fewer hours than their neighbors across the English channel for the same amount of output, while people in Japan work infamously long hours and seemingly get nothing out of it.
I guess I would expect labor productivity (GDP per hour worked) to be differ between countries a little bit, but it seems strange to me that unconditional convergence hasn't even held between western democracies. America seems to have some magical ability to be more productive than every country but France and Germany, and the UK is inexplicably much poorer than its European neighbors. Italy has understandably been a mess since the days of Silvio Berlusconi, but Japan's perennially low productivity does not match its reputation as a paragon of efficiency.
I also tried adjusting for the size of the capital stock in each country, with little success. First, I assumed output in each country of the G7 is produced with a typical neoclassical/Cobb-Douglas production function, i.e.
$$Y_t = A_t K_t^\alpha H_t^{1-\alpha}$$
where $Y_t$ is GDP, $A_t$ is total factor of productivity (TFP), $K_t$ is capital, and $H_t$ is total hours worked. Working with the somewhat unrealistic assumption that $\alpha$ (capital's share of output) is constant at $0.34$ for all of the G7, I calculated TFP by dividing $Y_t$ by $K_t^\alpha H_t^{1-\alpha}$[1]:
My partiality to the UK makes me happy that at least Britain is better off than Japan (incidentally my second favorite country in the G7), but I'm a little bit skeptical that even two world wars and decolonization made the UK lose 40% of its productive capacity relative to the United States, especially when the end of French empire didn't have the same consequences. Also, everyone talks about Japan's lost decade starting with the recession in the late 1990s, but the decline seems to have actually begun in the seventies, and the cause completely evades me.
Whenever I read about growth/development economics, it's usually taken for granted that America is at the technological frontier and that explains its unusually high productivity, but Canada's relative smallness looks like the only thing that could prevent us from giving it that title, at least from 1950 to 1980.
Unfortunately most of the growth/development economics research I encounter doesn't really care about 30% gaps between rich countries, but instead (and probably rightfully so) focuses on the 90% gaps between rich countries and poor ones -- heck, I'm looking into those gaps in Vietnam, Cambodia, Laos, and China for my school's version of a senior thesis. Maybe there is no real good explanation for why Japan or Britain haven't converged to America's level of GDP per capita in the 70 years since World War II, or why Canada has been losing ground for the last 30 years. It just really, really bothers me that there isn't.
[1] All the data I used comes from the Penn World Tables. Capital is the capital stock at constant national prices, GDP is GDP at constant national prices (I would use PPPs, but capital is only available at constant national prices and current PPPs, and the data seem to match World Bank's idea of constant PPPs in that they are at PPP for the base year), and Hours is the product of average hours worked per person engaged and total persons engaged.
One thing is that if you reflate capital and output and allow increasing returns to scale, you end up with a model that has approximately constant TFP (at least for the US, UK, and Mexico which are the cases I tested).
ReplyDeletehttps://informationtransfereconomics.blogspot.com/2016/09/the-kaldor-facts.html
I used total employed for labor force but total hours also works.
The thing is that the replication argument for constant returns to scale might make sense for real output and real capital, but doesn't make sense for nominal values (i.e. if we double everything, exactly why does the nominal price have to stay the same?). Therefore switching to nominal values not only gets rid of a constraint that makes TFP necessary, but additionally allows a model where TFP is *constant* to fit the data. This is a reasonable argument that we the human theorists created TFP because we were biased in our thinking.
PS It really bothered me that TFP, essentially a residual factor, was a huge contribution to growth. However the information transfer model is about "states" and sending signals. Since real dollars or real Yen aren't actually the signals being sent or defining the actual states, I ended up using *nominal* values for everything since nominal dollars and nominal Yen define the actual signals and the actual economic states. I carry nominal dollars in my wallet, and acquire a cup of coffee with those nominal dollars.
DeleteIn a sense, I think what I am trying to say is that the price of a good (5 dollars for a coffee) and the "real" output that good (1 cup of coffee) represents aren't separable in terms of information: one five dollar cup of coffee, two five dollar cups of coffee, etc. In physics we'd say price isn't a good quantum number, but price*quantity is.
Regarding increasing returns to scale, basically all of growth theory is about adding increasing returns to the Solow model. More here: https://jwhandley.blogspot.com/2017/09/increasing-returns-to-scale-is-integral.html
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