Macroeconomics Week 5 Notes
Macroeconomics Week 5 Notes Econ-UA 1
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This 7 page Class Notes was uploaded by Cindy Notetaker on Sunday October 16, 2016. The Class Notes belongs to Econ-UA 1 at New York University taught by Gerald McIntyre in Fall 2016. Since its upload, it has received 11 views.
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Date Created: 10/16/16
Chapter 12: Production and Growth Week 5 Production and Growth: studying the behavior of the macroeconomy in the long run --two properties of long run performance -GDP rises (inflation a adjusted GDP) -GDP spends up almost all of its time next to its potential GDP Rises --national output and income grow over the long run --there's a wide variation of living standards across the world -the standard of living=income per capital =output per person =real GDP per population GDP Spend Up Almost all of its Time Next to Potential --RGDP is very close to trend output and when it does deviate, it returns to trend output Standard of living continued... --the average annual income of a resident of the US: $51,000 --the average Mexican standard of living is lower: $16,300 --in C.A.R. : $562 -US income is 90x larger than C.A.R. (We're trying to answer why) *these differences are reflected in income are reflected in large differences in the quality of life* Growth --some east Asian countries (Singapore, South Korea, etc) grow 7%-10% annually --US and rich countries grow 2-3% --In sub-saharan: stagnated "poverty trap"; either no growth or reversal -Zimbabwe has had one odd the worth growth experience: for 1991 to 2011, income per person fell by a total of 38% The question: what can ewe do to maintain living standards, improve standards and wellbeing and avoid traps?? Recall: --High RGDP is associated with increased literacy rate, increased life expectancy, decreased mortality rates, increased education --Low RGDP is associated with the opposite World Population vs GDP per capital --only in the last 200 years we have some countries taking off in GDP --our default was originally at utter poverty GDP growth is important to us --in 1960, the average income was $17,000 --now, 56 years later, $51,000 --today's average citizen earns 3x the income -in another 56 years, it will likely be 3x that ($153,000) NOTE: because of economic growth, most American enjoy greater economic prosperity than did their parents, grandparents, and great-grandparents Growth can offset the Great Depression --doesn't matter in the long run, GDP cash swamp them Back then, the world was much more equal, now much more spread out -BUT bear in mind, it's not just the rich countries that grow Growth is the only way to reduce poverty --if you grow the average, the bottom also grows because you're moving everything up Why Growth Matters --small differences in growth rates gave large effects on living standards in the long run --if the US GDP per capital grew just 0.3% faster in the 10 years of the 90s the we would have been $500 billion higher by 2000 and would stay like that forever -that means grace ab extra $7600 a year per household --growth not only changes quantity, but it changes quality --growth makes the past feel like an entirely different country ex) in 1880, 4 million lb of horse manure deposited on the streets of New York everyday and 40 thousand gallons of urine everyday: technological progress changed with the automobile Key Variables of Economic Growth Real GDP (Y)=national output and income Y/pop=income per capital to per person (also =to the standard of living) Y/L=output per worker (productivity) Y/hrs=output per hour of work NOTE: the growth rate measures how rapidly real GDP per person grew in the typical year The Mathematics of Growth The Growth Trick --variable U=X*Z -the growth of U(%)=growth of X(%)+the growth of Z(%) Ex) If x grows at 3% if z grows at 7% then U grows at 10% a year The Rule of 70 --we ask how long it would take a variable to double -years to double=70/(average annual growth rate in %) Ex) China's RGDP increases by 8% every year... 70/g=70/8 =8.75 years for China's economy to double (For the US at 2%, it will take 35 years) *China will go through almost 4 doubling by the time the US doubles* Productivity=Labor Productivity --the ability to producing goods depends on productivity y=(y/L)*L Why productivity is so important: --a nation's standard of living is determined by the productivity of its workers --there is a link between productivity and the economic policies that a nation pursues Y=Y/L*L --if productivity, Y/L increases quickly, then output, Y, grows rapidly (other things equal), and Y/pop grows fast --a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services Ex) let's just say you're alone on a deserted island --you have to make and consume food, vegetables, clothing etc: this can be like a simple economy --your standard of living is determined by your productivity -aka, the quantity of goods and services produced from each unit of labor input --if you're good at catching fish, growing vegetables and making clothes, then you're living well -if you're bad at doing these things, then you're living poorly --since you can only consume what you can produce, your standard of living is tied to your productivity The Determinants of Productivity and its Growth Rate Capital: total stock of equipment ; K --workers are more productive if they have tools to work with --more tools allow workers to produce their output more quickly and more accurately --a factor of production used to produce all kinds of goods and services K/L=capital per worker Human Capital: embodied skills and knowledge of individual workers --acquired through education, training and experience --it raises a nation's ability to produce goods and services HK/L=human capital per worker Natural Resources per worker: --provided by nature such as land, rivers and mineral deposits --renewable and non-renewable NR/L --differences in natural resources in various parts of the world are responsive Le for some of the differences in standards of living around the world ex) countries like Kuwait and Saudi Arabia are wealthy because of the abundance of oil on their land NOTE: natural resources is the least important cause of productivity and living standards Technology: --takes many forms: there are different forms of technological knowledge ex) only Coca-Cola knows the recipe to their soft drink and it's locked up;Henry Ford introduced the assembly line and everyone used it and became more efficient, etc... A=technology Real GDP=labor productivity*labor input living standards=Y/Pop If productivity Y/L increases, then output... With the Determinants, we can conclude that: productivity Y/L is positively related to.. K/L HK/L (human capital) NR/L (natural reassures) technology=A --the level of technology makes workers more productive NOTE: Rival Risk--if I use it, you can't (unless I let you) --society's (NOT an individual's) knowledge on how best to produce things --progress -the ability to turn inputs into outputs -any advance in social know how -less is wasted and more input is directed toward production and output Aggregate Production Function a fnc, graph pr equation that shows relation between RGDP, Y and inputs Y=A*F(L,K,HK,NR) *contains the PHYSICAL inputs (not technology) --this Function has constant returns to scale (CRTS) --if you increase physical inputs with the same constant proportion, then Y will increase by that constant proportion ex) doubling all physical inputs (multiply each by 2) causes output to exactly double --2Y=A*F(2L,2K,2HK,2NR) Why CRTS? Justifying it... --it implies that size does not matter in our analysis -when you scale up or down, it doesn't affect an economy's productivity -a large economy doesn't have advantage or disadvantage over a small economy And therefore... --CTRS can be applied to any size economy Another property: -diminishing (marginal) returns for any additional unit of physical input increases output, but at a decreasing rate -when workers already have a large quantity of capital to use in producing goods and/or services, additional input unites only increase productivity a little bit ex) holding other inputs constant, just looking at changing input projector (K) provides many benefits to the class and makes the worker (professor) more productive --what if we had two projectors?? What would the professor even put? Does it really serve a purpose? It could be useful BUT NOT AS PRODUCTIVE as the first projector1 The Catch-Up Effect --poor countries tend to grow more rapidly than rich countries --in poor countries, workers lack the most basic tools and have low productivity, so even a small amount of capital investment can substantially raise workers productivity --in richer countries, capital is already so high so additional investment has a small effect on productivity Ex) let's say you were awarded "Most Improved" student... --this means that you began the year performing poorly --it was easier to perform better than students who had always worked hard and done their readings --while it's great that you were awarded with "Most Improved" student, it's still not as good as being awarded with the "Best Student" award Catch Up or Convergence in the Real World --evidence is mixed because it varies on countries -some poor countries grow slower than rich countries Productivity and Technology --it does not exhibit diminishing returns like physical inputs --it would shift the graphs (the ones above) upward and upward Economic Growth and Public Policy Question: what can government policy do to raise productivity and living standards? --saving and investment -a way that we can raise future productivity is to invest more in current resources in the production of capital -savings rise with the fall of consumption -there is a trade off between current and future consumption; if we focus more on producing capital, then we veer away from producing as much goods and services for current consumption; our resources are allocated for the future -some societies will choose a higher current consumption -to produce more capital goods requires producing fewer consumption goods --even society increases savings, investment, and K, then growth of K(L) and living standards is temporary -this is due to diminishing return a ex) some argue that poor countries should receive aid for investment -poor countries have high investment needs but low saving HOWEVER, people and government respond to incentives and so poor countries take aid, cut back on their own saving and so investment doesn't increase by much
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