There has been some discussion with regard to GDP growth in this election period. Those who did not study economics may not be clear about certain jargons being used. Traditionally, GDP = C + G + I + X-M meaning that GDP depends on consumption, government spending, investments and net exports. However, absolute quantity of GDP is not the focus most of the time but instead it is the GDP growth that is often the focus.
When comes to GDP growth, it is actually more complicated than it seems. According to a particular economic theory called neo-classical, the trend growth of GDP depends on growth from labor inputs, productivity increases from equipment or new machines (i.e. growth from capital inputs) and growth in total factor productivity which is growth from increase in the productivity in using capital inputs and resulting from increased efficiency in using capital inputs.
A mathematic form called the Cobb-Douglas production function is given by:
Y = ALαKβ,
where:
- Y = total production (the monetary value of all goods produced in a year)
- L = labor input
- K = capital input
- A = total factor productivity
- α and β are the output elasticities of labor and capital, respectively. These values are constants determined by available technology.
According to the Cobb-Douglas formula, GDP of a country is influenced by capital stock (measured by money supply) and labor input. It is also proportional to total factor productivity called TFP. Two greeks alphabet namely alpha and beta are coefficients are determined by regression and is generally thought of having a value of less than one. What this means is that that the TFP has a greater influence over the GDP growth compared to labor growth all else equal. Let’s take an example in which α is 0.5. If labor inputs increase by 1%, the impact is an increase in GDP growth by (1+1%)^0.5 – 1 = 0.50% all else equal. On the other hand, an increase in TFP of 1% translated to a direct GDP growth of 1%. As it can be seen that increase the TFP is more efficient than increase labor if the desire is to have a healthy GDP growth.
The following is a table showing the decomposition of GDP Growth of various countries in different time period:
Take China for instance. In the earlier years from 1978 to 1995, China had a significantly high growth in total productivity contributing to the GDP growth. However, in recent times from 1995 to 2007, its GDP growth was increasingly driven by capital stock. Its productivity has also declined and its growth in labor also declined. Moreover, with the exception of United Status, the rest face a declining total factor productivity growth.
What is also interesting is that there is a general trend in which a more developed country is, the lower the GDP growth will be. In other words, when a country moves from less to more mature economy, we cannot expect GDP growth to remain as high as before. We must accept a lower GDP growth.
Thus, there are three ways to influence GDP growth. A fast way is to increase labor inputs by importing foreigners. Another way is to increase capital stock which is commonly measured by money supply. However, a too high of growth in money supply has an inflationary pressure as what we are witnessing now. The best way to have a healthy GDP growth is to have a healthy growth in total factor productivity.
Unfortunately, the TFP is a statistic that cannot measured directly. It can only be derived by using the Cobb- Douglas formula as all other variables namely GDP, capital stocks and labor inputs are known quantity. So, what is Singapore TFP like? Actually I do not know since it can only be derived indirectly. A google search from the Internet showed that the research on TFP for Singapore are based on papers that are too old. Perhaps some economic students can take the challenge to get all the necessary data to perform the required regressions to determine it. But what is for sure is that the productivity in Singapore is very very low as mentioned many times by the media and newspaper.
For further reading: Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States and the European Union
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