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> Productivity has a precise economic definition - ratio of output to inputs - and correlates highly to standard of living. We don’t fully understand how and wh
by soVeryTired 8y ago
> Productivity has a precise economic definition - ratio of output to inputs - and correlates highly to standard of living. We don’t fully understand how and why technology advances, but we measure increased technology through a variable called the solow residual.
What happens when you can't measure the outputs? What's the total value added by the financial sector? Or the legal sector for that matter? If I invent an inexpensive cure for a disease that renders expensive medicines obsolete, has productivity gone up or down?
Regarding the Solow residual, you certainly can put income on one side of a regression, and estimates of labour and capital on the other side, and set them equal using a residual term. I don't think you can convincingly argue to anyone besides an undergrad economist that the residual represents technology though. Don't think too hard about what the units of that residual are...
- roymurdock 8y agoIt’s an approximation that needs to be imputed, and can’t be measured directly. It doesn’t need units to be a useful measure against itself at different periods, to measure the rate of change of how environmental variables effect a nation or firms production function. I think it’s cool and useful that someone tried to quantify how much infrastructure affects productivity by abstracting away all the immeasurable variables into one term. It’s an extremely important concept that deserves more work because of how closely it is tied to advances in standard of living. It’s not perfect but it’s very interesting and could be ripe for a revamp given how much data we are now collecting from all sources
- soVeryTired 8y agoMy point about units is that (depending on the exact model) if you change the units, your conclusion may change, which is absurd.