By YiLi Chien, Senior Economist
There are three main factors that drive economic growth:
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- Accumulation of capital stock
- Increases in labor inputs, such as workers or hours worked
- Technological advancement
Growth accounting measures the contribution of each of these three factors to the economy. Thus, a country's growth can be broken down by accounting for what percentage of economic growth comes from capital, labor and technology.
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It has been shown, both theoretically and empirically, that technological progress is the main driver of long-run growth. The explanation is actually quite straightforward. Holding other input factors constant, the additional output obtained when adding one extra unit input of capital or labor will eventually decline, according to the law of diminishing returns. As a result, a country cannot maintain its long-run growth by simply accumulating more capital or labor. Therefore, the driver of long-run growth has to be technological progress.
This post further investigates the relationship between sources of past economic growth and future performances, especially the periods after the Great Recession, among developed countries. We collected data from the Conference Board's Total Economy Database for nine major advanced economies1 from 1990 to 2013 and performed the following growth accounting exercise:
For each country, per capita output growth is first broken down into the respective contributions from capital stock, labor inputs and technological advancements (represented by total factor productivity, or TFP).2 Next, we divide our sample into two periods: before and after the financial crisis. This allows us to check if drivers of growth relate to the economic performance of a country, especially during or after the recession. Finally, we plot average gross domestic product (GDP) growth after the financial crisis against the average contribution to output growth of labor, capital and TFP before 2007, as shown in the figures below.
The result shows a positive correlation between past TFP and future growth among developed economies. The correlation coefficient was close to 0.60. Namely, those countries whose growth was driven by TFP before the crisis tended to have higher output growth afterward. However, the relationships between GDP growth after the crisis and the contribution to GDP from capital or labor were both negative. The correlation between output growth and labor was -0.68 and between output growth and capital was -0.30. The negative correlations suggest that countries with growth driven by capital or labor accumulation are less likely to do well in the future, especially during economic downturns. Our simple exercise also implies that the health of an economy depends on the source of growth instead of the growth itself.
In addition to the role TFP plays in driving long-run growth, this simple exercise shows that a country with robust TFP-driven growth prior to the Great Recession tended to do well relative to other countries following the recession.
Notes and References
1 The countries are Germany, Italy, France, the United States, Japan, Australia, Canada, Great Britain and Spain.
2 The labor inputs are measured by the total labor hours adjusted by quality of labor (human capital).
Additional Resources
- On the Economy: How to Measure the Black Market
- On the Economy: The Effects of Contract Enforcement and Corruption on Trade
- On the Economy: Why Has International Trade Increased So Much?
For more than 25 years, DriverTech has provided Drivers and Fleets with groundbreaking in-cab technology to maintain regulatory compliance, lower fuel costs, improve driver safety and improve operational efficiency. DriverTech accomplishes this through tight integration within its product—bringing the driver, the truck, the fleet and the customer together.
Mark Haslam
Founder & CEO
Mark has spent the last 25 years putting leading edge technology in the hands of drivers and fleets. Mark founded DriverTech with the goal of reinventing in-vehicle technology from simple GPS trackers and data terminals to true in-cab computers that enabled advanced fleet management. Mark continues to be a pioneer in the trucking technology market by driving the organization to constantly look for opportunities to better serve drivers and fleets with innovative solutions to critical business problems. Prior to founding DriverTech Mark held senior roles in marketing and product development at ELKEM, an industrial equipment and medical technology company. Prior to that Mark played a critical at Christenson Diamond Tools, a division of Norton Abrasives, where he helped lead major gains in market share. Mark received his Bachelor's degree from the University of Utah and then graduated with honors from the American Graduate School of International Management, also known as Thunderbird.
- Accumulation of capital stock
- Increases in labor inputs, such as workers or hours worked
- Technological advancement
Growth accounting measures the contribution of each of these three factors to the economy. Thus, a country's growth can be broken down by accounting for what percentage of economic growth comes from capital, labor and technology.
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It has been shown, both theoretically and empirically, that technological progress is the main driver of long-run growth. The explanation is actually quite straightforward. Holding other input factors constant, the additional output obtained when adding one extra unit input of capital or labor will eventually decline, according to the law of diminishing returns. As a result, a country cannot maintain its long-run growth by simply accumulating more capital or labor. Therefore, the driver of long-run growth has to be technological progress.
This post further investigates the relationship between sources of past economic growth and future performances, especially the periods after the Great Recession, among developed countries. We collected data from the Conference Board's Total Economy Database for nine major advanced economies1 from 1990 to 2013 and performed the following growth accounting exercise:
For each country, per capita output growth is first broken down into the respective contributions from capital stock, labor inputs and technological advancements (represented by total factor productivity, or TFP).2 Next, we divide our sample into two periods: before and after the financial crisis. This allows us to check if drivers of growth relate to the economic performance of a country, especially during or after the recession. Finally, we plot average gross domestic product (GDP) growth after the financial crisis against the average contribution to output growth of labor, capital and TFP before 2007, as shown in the figures below.
The result shows a positive correlation between past TFP and future growth among developed economies. The correlation coefficient was close to 0.60. Namely, those countries whose growth was driven by TFP before the crisis tended to have higher output growth afterward. However, the relationships between GDP growth after the crisis and the contribution to GDP from capital or labor were both negative. The correlation between output growth and labor was -0.68 and between output growth and capital was -0.30. The negative correlations suggest that countries with growth driven by capital or labor accumulation are less likely to do well in the future, especially during economic downturns. Our simple exercise also implies that the health of an economy depends on the source of growth instead of the growth itself.
In addition to the role TFP plays in driving long-run growth, this simple exercise shows that a country with robust TFP-driven growth prior to the Great Recession tended to do well relative to other countries following the recession.
Notes and References
1 The countries are Germany, Italy, France, the United States, Japan, Australia, Canada, Great Britain and Spain.
2 The labor inputs are measured by the total labor hours adjusted by quality of labor (human capital).
Additional Resources
- On the Economy: How to Measure the Black Market
- On the Economy: The Effects of Contract Enforcement and Corruption on Trade
- On the Economy: Why Has International Trade Increased So Much?
For more than 25 years, DriverTech has provided Drivers and Fleets with groundbreaking in-cab technology to maintain regulatory compliance, lower fuel costs, improve driver safety and improve operational efficiency. DriverTech accomplishes this through tight integration within its product—bringing the driver, the truck, the fleet and the customer together.
Mark Haslam
Founder & CEO
Mark has spent the last 25 years putting leading edge technology in the hands of drivers and fleets. Mark founded DriverTech with the goal of reinventing in-vehicle technology from simple GPS trackers and data terminals to true in-cab computers that enabled advanced fleet management. Mark continues to be a pioneer in the trucking technology market by driving the organization to constantly look for opportunities to better serve drivers and fleets with innovative solutions to critical business problems. Prior to founding DriverTech Mark held senior roles in marketing and product development at ELKEM, an industrial equipment and medical technology company. Prior to that Mark played a critical at Christenson Diamond Tools, a division of Norton Abrasives, where he helped lead major gains in market share. Mark received his Bachelor's degree from the University of Utah and then graduated with honors from the American Graduate School of International Management, also known as Thunderbird.
Brendan Marshall
CFO
Brendan is responsible for the financial management of DriverTech and working with the CEO to drive many of the company's strategic initiatives. With over 25 years of experience working with technology and growth companies as an executive and investor, Brendan oversees the strategy, reporting and compliance functions for DriverTech. While financial reporting, analysis, and forecasting may be the crux of his duties, Brendan is also focused on identifying, evaluating, and executing on opportunities to drive growth and operational improvements for DriverTech.
Jan DeHoop
Head of Engineering
Jan leads DriverTech's software development and information technology organization. Beyond the 4 languages he speaks, he's also fluent in IT and Business. In fact, for most of his 25 year career, he's taken great pride in helping non-technical customers and employees understand how technology can be used to enhance business performance. Jan has excelled in a variety of IT leadership roles, but always considered himself a player/coach who understands technology from the ground up. Jan began his career in the US Air Force and later moved on to roles at Advanced Micro Devices (AMD) and most recently as Senior Director of Engineering at the hotel internet services company, iBAHN.
Steve Sanderson
Director of Sales
Steve leads DriverTech's client engagement operations, engaging with fleets of all shapes and sizes. Steve's hands on approach ensures client roll outs go smoothly and driver acceptance is high. Prior to DriverTech, Steve developed the emerging in-cab video market by managing local and national accounts at SmartDrive and Lytx. Prior to that, Steve was a founding member of Rand McNally's mobile communication group that launched truck safe navigation and ELD products to thousands of drivers.
Drivers Florens Technology Development Center
Armando Castro
Director of Client Services
Armando is charged with ensuring customers consistently realize success through deployment of the DriverTech platform. He is responsible for all customer operations, including day-to-day customer support and onboarding. Armando is passionate about implementing customer success best practices and fostering a customer-centric culture within DriverTech. By developing trusted, long-term relationships, his team has fostered significant driver and fleet satisfaction. Prior to working at DriverTech, Armando managed customer relationships for one of Qualcomm OmniTracs largest territories.
Mason Meadows
Strategic Advisor
Mason is a senior product strategy and business development executive with 15 years of experience across transportation, logistics, healthcare and technology. He has a long history of turning around and growing products that range from enterprise software and analytics applications to mobile apps and telematics devices. Mason was formerly Vice President of Product Development at Rand McNally and mostly recently has served in senior roles at Runzheimer, Trimble and Diversis Capital.
Drivers Florens Technology Development
Cal Rogers
Drivers Florens Technology Development Corporation
Director of Business Development
Cal is a senior business development professional with nearly 20 years experience in transportation and logistics. Cal's experience includes senior roles at Instructional Technologies, Rand McNally, Maptuit (Now Verizon/Telogis) and ALK (Now Trimble). Cal started his career as Lieutenant in the US Coast Guard.
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