Verdoorn's Law
Encyclopedia
Verdoorn's law is named after Dutch economist, Petrus Johannes Verdoorn. 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 is also found in subsequent estimations of the law. Nicholas Kaldor
(1966, p. 289) reports a 0.484 coefficient.
Verdoorn's law differs from the “the usual hypothesis … that the growth of productivity is mainly to be explained by the progress of knowledge in science and technology” (Kaldor, 1966, p. 290), as it typically is in neoclassical models of growth (e.g. 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.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, this law pertains to the relationship between the growth of output and the growth of productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
. 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 is also found in subsequent estimations of the law. Nicholas Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
(1966, p. 289) reports a 0.484 coefficient.
Verdoorn's law differs from the “the usual hypothesis … that the growth of productivity is mainly to be explained by the progress of knowledge in science and technology” (Kaldor, 1966, p. 290), as it typically is in neoclassical models of growth (e.g. the Solow model
Exogenous growth model
The neoclassical growth model, also known as the Solow–Swan growth model or exogenous growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics...
). 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
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
and Anthony Thirlwall
Anthony Thirlwall
Tony Thirlwall is Professor of Applied Economics at the University of Kent. He has made major contributions to regional economics; the analysis of unemployment and inflation; balance of payments theory, and to growth and development economics with particular reference to developing countries...
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.