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Date Created: 03/04/15
Introduction to Economic Growth 02102015 Nominal GDP 0 Not corrected for rates of in ation Real GDP Corrected for rates of in ation Introduction to Economic Growth 0 Growth 0 The change in real GDP over time 0 Not interested in change of nominal GDP We cant distinguish how much of change is due to increase in prices and how much is due to change in production 0 Growth Rate 0 Annual percentage change in real GDP o DetaY Y always stands for real GDP Year G PEnrliEr o The Rule of 70 Used to calculate years for some growing quantity to double 70 Growth Rate a growth rate is expressed as a number greater than 1 Years to Double 702 2 years 707 f years 10 70 l 7 years El 0 Real Per Capita GDP 0 it is growth rate of real per capita GDP that correlates most closely with improvement in living standards 0 Real Per Capita GDP Real GDP Population 0 We focus on this when thinking about growth 0 Growth rate of per capita GDP o DeltaY Population 0 Growth rate of Y Growth rate of pop 0 DeltaY DeltaPopulation Signi cance of Growth 0 Economic growth is the ultimate determinant of such variables as Nutrition n Whether people in the country get sufficient nutrition n Adequate number of calories to sustain them Literacy a How many people can read or write Infant mortality a What is the chance that a child will live past his 2nCI or 3rd birthday Life expectancy a When a child is born how long will we expect them to live on average Incomes and Growth Around the World 0 Since growth rates vary country rankings can change over time Poor countries aren t necessarily doomed to poverty forever Rich countries can t take their status for granted a May be overtaken by poorer but fastergrowing countnes 02102015 Key to Growth 0 Productivity 0 Essential to growth 0 Quantity of goods and services that can be produced by one worker with one hour of work quotperson hourquot one worker working one hour 0 real GDP person hours Example Couan produces 10B of GDP with 13 person hours of labor Country produces of with 53 person hours of labor Which country has higher productivity productivity in Country A is 10 per person hr productivity in Country B is 5 per person hr 0 a country s standard of living depends on its ability to produce goods and services this ability depends on productivity the average quantity of goods and services produced per hour of labor input Y real GDP quantity of output produced L number of labor hours Productivity Y L output per labor hour 0 Why Productivity Is So Important 0 When a nation s workers are very productive real GDP is large and incomes are high 0 When productivity grows rapidly so do living standards 0 Two factors that determine productivity Capital a Doesn t mean money or invested funds n It means machines tools factories buildings software Goods used to produce other goods Technological change a Not question of the number of machines or number of factors a It s a question of how sophisticated they are What caused productivity slowdown 19731994 0 No universally agreed answer but several hypotheses Productivity didn t really slow down Only appeared to slow down due to measurement problems a Dif culty measuring productivity in services a Dif culty measuring improvements in health and safety Deterioration of US education system a Less productive workforce Productivity in the US 0 Can US maintain high rates of productivity growth Some economists argue that development of quotnew economyquot based on information technology caused higher productivity growth that began in mid 19905 and many expect it to continue Others are skeptical n Argue that by early 20005 innovations in information and communications technology were having greater effect on consumer products than on labor productivity Physical Capital Per Worker 0 O O O 0 Formal growth model Stock of equipment and structures used to produce goods and services called physical capital denoted K L denotes number of labor hours worked within country K L capital per labor hour Productivity is higher when average worker has more capital machines equipment etc Human Capital Per Worker 0 Human capital Knowledge and skills workers acquire through education training and experience Productivity is higher when average worker has more human capital education skills etc Technological Change 0 Technology processes a rm uses to turn inputs into outputs o Technological change an increase in quantity of output rms can produce with a given quantity of all inputs not just labor Given amount of labor given amount of capital Three Sources of Technological Change 0 Better machinery and equipment Computers software machine tools electronics 0 Increases in human capital Education training experience 0 Better organization and management of production quotjustintimequot system a ordering parts as you needed them so you didn t have to have large space for storage The Per Worker Production Function 0 Relationship between real GDP per hour worked productivity and capital per hour worked holding the level of technology constant Per Worker Production Function amp Diminishing Returns 0 Higher K L means higherY L It will be upward sloping QlltF llt per whan walked Y i lL lKi lL f WDIFKEd ltgt n diminishing marginal returns to capital is reason why it s not linear everything is constant but there s more capital so there s higher output but less additional output llf workers have little givin them more increases their prodluctiviity a lot if workers already have a lot of giving them more in creases productivity fairly littii blue line is drawn for given level of technology a only thing changing is KL o diminishing returns to capital hour iiiiorhineizli m 7 7 Per39eimrkeir 2 laatlllowdlniiniahlmg l F f n increases in output per 72quot L i 1 Equal increases in capitalipar a quot mrlteri Capttall per hour worked smaller and smaller boost in capital 0 technological change helps economies overcome diminishing marginal returns of capital a ihou rmrrlmdl WL 3 3 39 Produc on 5315 rst furm ff 7 Lg Produciim v 39 39 jar 3 lum on r 4 7 Elton 139 A 39 a 5 1 739 Production function 14 SE n Capital 1P9 Wuquot momma n with the same amount of capital per worker you get higher productivity a capital per hour worked doesn t change 02112015 Per Worker Production Function 0 Relationship between real GDP per hour worked and capital per hour worked holding level of technology constant 0 Capital referring to machines hardware buildings New Growth Theory 0 Model of longrun economic growth that emphasizes that technological change is in uenced by economic incentives and so is determined by the working of the market system 0 Key to economic growth 0 Accumulation of knowledge capital Training education skills experience 0 Physical capital subject to diminishing returns 0 Smaller and smaller boost in productivity 0 Knowledge capital subject to increasing returns 0 The more you have the more you can get Says knowledge capital is really most important for economic growth 0 Government policy can help increase accumulation of knowledge capital in 3 ways 0 Protecting intellectual property rights with patents and copyrights Patent gives exclusive right to produce a product for a period of 20 years form the date the product is invented o Subsidizing research and development 0 Subsidizing education Convergence 0 De nition poor countries will grow faster than richer countries and eventually catch up in terms of GDP per capita Why would we expect convergence 0 Technology transfer Poor countries don t have to reinvent they can adopt and adapt technologies that were developed elsewhere They don t have to expend resources to do basic research themselves 0 Poorer countries can attract more capital In this context capital means nancial capital Takes nancial capital to buy the physical capital Poor countries start with low K capital stock a Means marginal capital in those countries is high 0 High MPK MP means marginal product 0 Means higher returns to investment Higher domestic saving and higher investment by foreigners What the theory predicts o Poorer countries should grow faster and be on the higher section of the light 0 Richer countries should grow slower and be on the lower section of the line 0 Absolute convergence 0 Means that convergence is inevitable Poor countries will inevitably grow fast enough to catch up to richer countries 0 This is NOT TRUE Contingent convergence 0 Says that a country s ability to catch up to a richer country is contingent depends on upon certain other factors 02132015 Convergence 0 Poor countries will grow faster than richer countries and eventually catch up in terms of GDP per capita Two reasons why that would be expected 0 Poorer companies attract more capital Because they have a higher marginal product of capital n Because they start with a lower capital stock smaller amount of capital 0 So marginal return of that capital is very high 0 Technology transfer Technology doesn t have to be reinvented in poor countries they can adopt and adapt Three Approaches to Development 0 Environmental Approach Jeff Sachs 0 Geography where on the globe are they locatedsituated read the article by Jeff Sachs called quotInstitutions Matter but Not for Everythingquot climate 0 endemic disease like malaria inaccessibility of trade routes landlocked countries lack of natural resources 0 policy implications the only way that countries that are in this position can overcome a lot of the problems caused by where they re located is by foreign aid a main implication of Sach s position in the environmental situation is foreign aid he is for it 0 International Trade Approach 0 Will grow or not based on how open you are to commerce with the rest of the world how integrated your economy is with the rest of the world 0 Two dimensions of integration into the world economy Trade in goods and services 0 OO a Do you allow imports do you allow exports a Importsubstituting industrialization Says we should ban all imports especially things like machinery steel tools and make it ourselves Super cially sounds like a good idea but is a disaster in reality Capital in ows a Two ways to have capital in ow 0 Financial capital 0 Financial investment Investing in a domestic business that is already on the run 0 Take your money and send it over to a country to invest in a company 0 FDI 0 Foreign direct investment 0 Means that a foreign company comes in and actually builds and operates a unit of their business in the country n In favor of globalization Good thing that more and more countries are trading with each other throughout the world 0 Good that there s a higher volume of imports and exports throughout the world lnstitutionalApproach 0 Based on role of institutions in any economy Legal system a Is the legal system fair Political system a Is the political system stable or are there constant coups Is there any kind of movement in the country that poses a threat to the stability of the government Monetary stability u If you have very high in ation it makes it very difficult to do business Corruption 0 quotUnlocking Growth in Africaquot article by Kenneth S Rogoff 0 article quotWhy Poor Countries are Poorquot
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