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Comparison of the Development of GDP Quality in the Czech Republic and Germany.

JEL Classification C10 * O10

This note introduces a new way to analyze whether gross domestic product (GDP) development is based on intensive or extensive factors. The issue was originally solved by growth accounting that assesses how growth rates of labor, capital and technological progress contribute to the GDP growth rate (e.g., Barro 1999). The technological progress growth rate can be seen as an intensive factor and the labor and capital growth rates as extensive ones. However, growth accounting is principally constructed for GDP growth and not for other possible situations, such as GDP decline or stagnation. It further measures the contribution of all factors in absolute values, although the contributions of labor and capital are weighted. Although it permits calculation of the relative shares of each factor, problems arise if the GDP growth rate and the growth rate of any factor develop inversely (e.g., the capital growth rate is positive and the GDP growth rate is negative). Whether capital and labor can be assessed separately should also be discussed. Every capital good must be operationalized by at least some unit of labor.

Therefore, we offer an alternative approach. Generally, output can be seen as a function of inputs multiplied by their productivity (efficiency). This relationship can be used both at the individual (company) level, as well as at the national (GDP) level. Our approach summarizes inputs in a so-called total input factor (TIF). It is not possible to use labor without capital and capital without labor. In our approach, TIF is multiplied by total factor productivity (TFP). The result is GDP. The relationships can be made dynamic. Then the growth rate (or index) of GDP is the product of the TIF and TFP growth rates (or indexes). The so-called dynamic intensity parameter, respectively the dynamic extensity parameter, can be derived from these relationships. The first parameter assesses how the change in TFP contributes to the change in GDP, and the second assesses the same for the change in TIF. The parameters are derived as follows: First, the logarithm of all the growth rates (or indexes) is calculated. We then apply the rule that the product of the logarithms equals the sum of the logarithms. The dynamic intensive parameter is the share of the logarithm of the growth rate (or index of change) of TFP to the absolute value of the logarithm of the growth rate (or index of change) in GDP. Similarly, the dynamic extensity parameter is the share of the logarithm of the growth rate (or index of change) in TIP to the absolute value of the growth rate (or index of change) in GDP.

The value of both parameters is between -1 and 1. For instance, the value of the dynamic intensity parameter, -0.8, means that the parameter contributes to the decline in GDP by 80%. Generally, it is valid. If both parameters are positive, the result is GDP growth. If any parameter is positive and the second one is negative and the absolute value of the first is higher than the absolute value of the second, the result is also GDP growth. If a) any parameter is positive and the second one is negative and the absolute value of the first one is lower than the absolute value of the second; or b) both parameters are negative, then the result is GDP decline. If any parameter equals 0.5 and the second one equals -0.5, the result is GDP stagnation. This construction of parameters allows classification of all possible types of development including GDP decline and stagnation. The situation of GDP decline is obvious, but it is useful to know the cause of decline. The long-run negative value of the dynamic intensity parameter indicates that the countries with such values face serious problems. The parameter can thus be used as an indicator evaluating macroeconomic development.

Parameters were applied for investigating Czech and German GDP development between the years 1991 and 2016. The analysis confirms that the GDP of both countries develops similarly and that Czech GDP development is based on German GDP development. The Czech Republic achieved only a slightly higher average GDP growth rate for the whole period (1.77%) compared to Germany (1.47%). The biggest difference is in the labor factor, which in the Czech Republic is declining on average by a quarter of a percent from one year to the next, while in Germany it is growing annually by half a percent. Intensity and extensity are also similar. Predominantly extensive development occurs in both cases, however with high intensity. The intensity in the Czech Republic for the period is four percentage points higher, reaching 42%, while in Germany it is 38%. Further research should further investigate the properties of the parameter, advantages and disadvantages, and areas for future application. The parameters can also assess other countries and periods.

Acknowledgments This paper was created as part of the project "Improvement of pension system as an intensifying economic factor" and was supported by the University of Finance and Administration.

Petr Wawrosz (1) * Jana Kotesovcova (1) * Jiri Mihola (1)

(1) University of Finance and Administration Prague, Prague, Czech Republic

Petr Wawrosz

petr.wawrosz@centrum.cz

Published online: 13 February 2018

https://doi.org/10.1007/s11294-018-9673-0
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Title Annotation:RESEARCH NOTE
Author:Wawrosz, Petr; Kotesovcova, Jana; Mihola, Jiri
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4EUGE
Date:Feb 1, 2018
Words:874
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