Verdoorn's law is named after Dutch economist Petrus Johannes Verdoorn (1949).[1] It states that in the long run productivity generally grows proportionally to the square root of output. In economics, this law pertains to the relationship between the growth of output and the growth of productivity. According to the law, faster growth in output increases productivity due to increasing returns. Verdoorn (1949, p. 59) argued that "in the long run a change in the volume of production, say about 10 per cent, tends to be associated with an average increase in labor productivity of 4.5 per cent." The Verdoorn coefficient close to 0.5 (0.484) is also found in subsequent estimations of the law.[2]
Description
Verdoorn's law describes a simple long-run relation between productivity and output growth, whose coefficients were empirically estimated in 1949 by the Dutch economist. The relation takes the following form:
where p is the labor productivity growth, Q the output growth (value-added), b is the Verdoorn coefficient and a is the exogenous productivity growth rate.[3]
Verdoorn's law differs from "the usual hypothesis […] that the growth of productivity is mainly to be explained by the progress of knowledge in science and technology",[4] as it typically is in neoclassical models of growth (notably the Solow model). Verdoorn's law is usually associated with cumulative causation models of growth, in which demand rather than supply determine the pace of accumulation.
Nicholas Kaldor and Anthony Thirlwall developed models of export-led growth based on Verdoorn's law. For a given country an expansion of the export sector may cause specialisation in the production of export products, which increase the productivity level, and increase the level of skills in the export sector. This may then lead to a reallocation of resources from the less efficient non-trade sector to the more productive export sector, lower prices for traded goods and higher competitiveness. This productivity change may then lead expanded exports and to output growth.
Thirlwall (1979) shows that for several countries the rate of growth never exceeds the ratio of the rate of growth of exports to income elasticity of demand for imports. This implies that growth is limited by the balance of payments equilibrium. This result is known as Thirlwall's Law.
Sometimes Verdoorn's law is called Kaldor-Verdoorn's law or effect.
References
Kaldor, N. (1966), Causes of the Slow Growth in the United Kingdom, Cambridge: Cambridge University Press
Thirlwall, A. P. (March 1979), "The balance of payments constraint as an explanation of international growth rate differences", Banca Nazionale del Lavoro Quarterly Review
Verdoorn, J. P. (1993), "On the Factors Determining the Growth of Labor Productivity", L. Pasinetti (ed.), Italian Economic Papers, Oxford: Oxford University Press, vol. II
Notes
^"Verdoorn's Law". Retrieved 2009-06-17. sourced from Verdoorn, P J (June 1980), "Verdoorn's Law in Retrospect: A Comment", Economic Journal, Royal Economic Society, 90 (358): 382–85, doi:10.2307/2231798, JSTOR 2231798
verdoorn, named, after, dutch, economist, petrus, johannes, verdoorn, 1949, states, that, long, productivity, generally, grows, proportionally, square, root, output, economics, this, pertains, relationship, between, growth, output, growth, productivity, accord. Verdoorn s law is named after Dutch economist Petrus Johannes Verdoorn 1949 1 It states that in the long run productivity generally grows proportionally to the square root of output In economics this law pertains to the relationship between the growth of output and the growth of productivity According to the law faster growth in output increases productivity due to increasing returns Verdoorn 1949 p 59 argued that in the long run a change in the volume of production say about 10 per cent tends to be associated with an average increase in labor productivity of 4 5 per cent The Verdoorn coefficient close to 0 5 0 484 is also found in subsequent estimations of the law 2 Description EditVerdoorn s law describes a simple long run relation between productivity and output growth whose coefficients were empirically estimated in 1949 by the Dutch economist The relation takes the following form p a b Q displaystyle p a bQ where p is the labor productivity growth Q the output growth value added b is the Verdoorn coefficient and a is the exogenous productivity growth rate 3 Verdoorn s law differs from the usual hypothesis that the growth of productivity is mainly to be explained by the progress of knowledge in science and technology 4 as it typically is in neoclassical models of growth notably the Solow model Verdoorn s law is usually associated with cumulative causation models of growth in which demand rather than supply determine the pace of accumulation Nicholas Kaldor and Anthony Thirlwall developed models of export led growth based on Verdoorn s law For a given country an expansion of the export sector may cause specialisation in the production of export products which increase the productivity level and increase the level of skills in the export sector This may then lead to a reallocation of resources from the less efficient non trade sector to the more productive export sector lower prices for traded goods and higher competitiveness This productivity change may then lead expanded exports and to output growth Thirlwall 1979 shows that for several countries the rate of growth never exceeds the ratio of the rate of growth of exports to income elasticity of demand for imports This implies that growth is limited by the balance of payments equilibrium This result is known as Thirlwall s Law Sometimes Verdoorn s law is called Kaldor Verdoorn s law or effect References EditKaldor N 1966 Causes of the Slow Growth in the United Kingdom Cambridge Cambridge University Press Thirlwall A P March 1979 The balance of payments constraint as an explanation of international growth rate differences Banca Nazionale del Lavoro Quarterly Review Verdoorn J P 1993 On the Factors Determining the Growth of Labor Productivity L Pasinetti ed Italian Economic Papers Oxford Oxford University Press vol IINotes Edit Verdoorn s Law Retrieved 2009 06 17 sourced from Verdoorn P J June 1980 Verdoorn s Law in Retrospect A Comment Economic Journal Royal Economic Society 90 358 382 85 doi 10 2307 2231798 JSTOR 2231798 Kaldor 1966 p 289 Application of Verdoorn s Law to the Small Scale Sector in India proquest com Kaldor 1966 p 290 Retrieved from https en wikipedia org w index php title Verdoorn 27s law amp oldid 1062654576, wikipedia, wiki, book, books, library,
