Measures of Sustainable Growth

One way is to use the growth accounting equation. Problem: no reliable data.

Alternative way: focus on the productivity of the labor force.

Labor productivity is the quantity of goods and services (real GDP) that a worker can produce in one hour of work.

Labor productivity = Real GDP/Aggregate hours

Dividing the production function by 1/L,

Y/L= AF(1,K/L)

where Y/L is output per worker, which is a measure of labor productivity.

The level of labor productivity depends on the accumulated stock of human and physical capital and is much higher in the developed countries.

The growth rate of labor productivity is the percentage increase in productivity over a year. Typically higher in the developing countries where human and physical capital is scarce but growing rapidly.

Potential GDP = Aggregate hours worked × Labor productivity

Potential growth rate = Long-term growth rate of labor force + Long-term labor productivity growth rate