Practice question · Multiple choice
Growth accounting finds that most of the income gap between rich and poor countries is not explained by capital or education. What does that residual tell us?
Hints
- Two countries with the same machines and the same schooling produce different amounts. Ask what differs.
- The residual is what is left after the measurable inputs. What does it stand for?
Show the answer
D. That how inputs are combined matters more than how many
Why
TFP is a measure of our ignorance and also a finding: give a poor country identical capital and schooling and it still produces less, so the binding constraint is organisational rather than physical. It is why development economics turned toward institutions after decades of financing machines.
Practise Growth and Convergence
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