ANCHORING GROWTH
ANNEX I. THEORETICAL FRAMEWORK
Cross-country variation in the levels of output per capita can be decomposed following the methodology of Hall and Jones (1999). In particular, a standard aggregate Cobb-Douglas production function with physical capital, human capital, and labor as production factors and labor- augmenting technological progress is assumed:
∝ ∝ ∝ ∝ where Y, K, H, h, L, and A stand for output, physical capital, effective labor input, human capital per worker, employment, and total factor productivity (TFP) respectively.
This can be rewritten as:
∝/ ∝
Subsequently, GDP per capita can be written as:
∝/ ∝ where POP stands for population.
Data on PPP-adjusted output, physical and human capital stocks, population, and employment are taken from Penn World Tables 8.0. Assuming a capital share α of ⅓, consistent with the literature, TFP can be derived as: