March 18, 2015

The Economic Growth Accounting

Like any business, an economy has an accounting model that can be used to measure growth.  Here is an equation or model for economic growth.

The above equation means that the growth in the income of an economy () depends on labor growth () –the growth of population who are able to work, growth in capital () – machinery and other equipment (like computers, manufacturing equipment, desks, and the likes), and Technical or productivity growth (  ). For example, you are a toll operator; last year you where using calculator to calculate change to your customers. After a year, you become used to it; as a result you’re only using your mind to calculate change, calculating becomes easy and faster to you and as another result you were able to do other duties such as checking the accounting books. The given scenario was an example of productivity growth.

The other part of the equation above is the labor share () and capital share (). Notice that capital share is part of labor share; this means that when we already know the capital share (for example 25%) labor share is automatically calculated (75%) and vise-versa.  The value of labor and capital share can determine whether a country is labor intensive or capital intensive.  Developing countries are most likely to become a labor intensive because of lower cost of labor compared to developed countries (US, European Countries, and the likes).

The simple meaning of above model is that we can grow the total income of our country by creating jobs, investing in capital goods, and increasing productivity through education and training. Easy said than done, the question arises why many countries are still experiencing insecurity and poverty.

A model can only simplify the reality but cannot produce the complete reality. Thus, we cannot expect that one model will solve each and everyone’s economic or financial problems, but if each person will strive to solve his own economic problems, then probably economic models will work easily.

It is like when one person was given an opportunity and he does not grab it, our economic models were wasted.

1 comment:

  1. Well that is the main function of models to simplify the reality that is too complex.


Subscribe to Philippine Economist via Email