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This paper was written while I was a summer intern in the European I Department. I would like to thank Alun Thomas and Sharmini Coorey for their valuable comments and the Maritime Division of the European I Department at the IMF for their encouragement and hospitality. Any errors are my responsibility.
Here, the Solow residual could be considered as the sum of technological change and a factor that could depend on knowledge spillovers (Romer, 1986); or R&D spending through an increase in the number of varieties for inputs (Romer, 1990) or their quality (Aghion and Howitt, 1992).
However, there are still unsolved issues regarding measures of value added (gross vs. net, and national vs. domestic), and the coverage of the output sectors (including housing and/or government sector or not).
Different patenting practices over time and across countries hinder the analysis of their economic content.
The national accounts approach ignores the possibility of increasing returns to scale in production and does not take account of the impact of government policies and regulation. The regression approach might generate biased ordinary least squares (OLS) estimates of the factor shares because of the significant correlation between the growth rate of inputs and TFP growth and measurement errors in factors of production.
Sarel computes compensation for the use of capital inputs as the difference between the gross surplus (i.e., the sum of capital consumption and the net operating surplus from the national accounts) and the compensation of labor (i.e., compensation of employer and own-account workers and compensation of unpaid family workers).
However, the limited sample and coverage (20-25 percent of GDP in OECD countries), as well as the lack of adjustment for cross-country differences in product quality, discourage their use (van Ark, 1996a).
The PPP index between two countries does not equal the ratio of PPPs between each of these two countries with a third one. Hence, binary indices cannot provide a unique ranking of countries according to their productivity level.
Base country invariance is achieved if the weights represent an average of all countries in the sample.
Here, the matrix of real quantities cannot be consistently added up across the columns (representing the countries) and the rows (representing the products or industries).
The Geary-Khamis method derives an international price for commodities simultaneously with the purchasing power parity, and it is essentially an average of the prices of all countries. On the other hand, the generalized Theil-Tornqvist index (i.e., a multilateral version of the binary Theil-Tornqvist index) is a geometric average of binary (Fisher) UVRs weighted at average value shares of two countries.
As Hulten (2000) states, the Malquist productivity index is the Geometric Mean of the answers to these two questions: (i) how much output could country A produce if it used country B’s technology with its own inputs? and (ii) how much output could country B produce if it used country A’s technology with its inputs?
O’Mahony divides the workforce skills into three categories: those with higher levels of qualification (degree or above), intermediate qualifications (vocational qualifications above high school but below degree), and those with low or no skills.
TFP catch-up implies a tendency for convergence in income levels. However, such a tendency may be biased if factor intensity growth varies systematically with income (Dowrick and Nguyen, 1989).
A summary of the interpretations of the Solow residual according to different endogenous growth models is presented in Table 6.
For instance, the decentralized equilibrium in Rebelo (1991) is Pareto-optimal, so no-intervention is the best policy. Other models feature positive externalities to human capital or ideas, leading to low growth in the absence of government subsidies. The activity deserving subsidy differs across the models, with some pointing to human capital investment and others to R&D. Moreover, as Romer (1993) emphasizes, the positive and normative implications of openness (e.g., to trade, foreign direct investment, and the flow of ideas) differ drastically across models. Some models imply that greater openness can slow down growth (Young, 1991), while others imply that openness can speed up growth (Romer, 1990)
The vintage effect states that new capital is more productive than old capital per (constant) dollar of expenditure. If the capital stock is not adjusted for vintage effects, we could expect a negative correlation between change in the average age of capital and productivity growth.
The accumulation of human capital enhances the ability of the labor force to adapt more easily to new processes and new industries, thus increasing productivity. Furthermore, positive externalities to human capital could generate greater productivity gains.
If we restrict to our sample of OECD countries, the correlation between growth in human capital and growth in real per capita GDP is 0.13.
Coe and Helpman found that foreign R&D capital stocks might be at least as important as domestic R&D capital stocks in the smaller countries, whereas in the larger countries (e.g., G-7 countries) the domestic R&D capital stocks might be more important.
These indices are: (1) Sachs and Warner Openness Index, (3) World Development Report Outward Orientation Index, (3) Learner’s Openness index, (4) Average Black Market Premium; (5) Average Import Tariff on Manufacturing; (6) Average Coverage of Non-Tariff Barriers; (7) Heritage Foundation Index of Distortions in International Trade; (8) Collected Trade Taxes Ratio; (9) Wolf’s Index of Import Distortions.