Week 6 notes for Macro
Week 6 notes for Macro 22260
University of Memphis
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Ahsiahna Ford (Icey)
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This 5 page Class Notes was uploaded by Bradley Notetaker on Sunday February 28, 2016. The Class Notes belongs to 22260 at University of Memphis taught by Speer in Winter 2016. Since its upload, it has received 25 views. For similar materials see Intro to Macroeconomics in Economcs at University of Memphis.
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Date Created: 02/28/16
Chapter 7 22316 A nation can increase its GDP by: 1) Increasing its stock of physical capital, K 2) Increasing the total efficiency units of labor, H 3) Improving its tech., A Consider a simple economy where there is no government nor exports of imports… so G=X=M=O Therefore, on the expenditure side, Y=C+I Y=C+I=C+S…. I=S Aggregate saving (S) How much we save as a country Consumption brings immediate happiness, while saving leads to future consumption and thus future happiness For the individual consumptionsaving decision, the relevant price is the interest rate The sum total of these individual decisions determine the saving rate of the economy: Saving rate= total saving/GDP Physical capital accumulation by itself cannot generate sustained growth due to the diminishing marginal product of phusical capital More and more capital will generate smaller and smaller GDP increases Therefore, a constant growth rate cannot be achieved by just increasing capital Similarly, human capital by itself cannot generate sustained growth due to the diminishing marginal product of labor and diminishing marginal product skills Mare and more H will generate smaller and smaller GDP increases So a constant or sustained growth rate cannot be obtained by increasing human capital Technological change Can actually generate sustained economic growth Technological change is more than a constant increase, such as 10 more units. Rather, it is exponential in that the rate of increase is approximately constant, such as 10% New innovation and tech buld on existing stock of knowledge and thus are not subject to diminishing returns The economic history of the world can be broken down as such: 1) Premodern times: up to 1800 2) Industrial Rev: 1800 to 1820 3) Postindustrial Rev: 1820 to present Thomas Malthus, writing in 1798, argued that human kind was destined to live at the subsistence level: the min. level of income per person necessary to survive According to Malthusian Cycle, any increase in income per capita above the subsistence level would lead to higher fertility rates THIS WAS PROVED WRONG 1) Industrial Rev. created tech. progress necessary for sustained growth 2) Movement of people from rural agriculture areas to urban manufacturing led to a drop in fertility rates ( demographic transition) Industrial Rev. was the beginning of major tech. growth Was the beginning of sustained growth PostIndustrial Rev. period has experienced sustained growth in income per capita due to dramatic innovations GDP per capita is a measure of the average living standard of a nation but not the income of all individuals in that nation Therefore must look at the income inequality of a nation Although the negative relationship does not prove that growth causes declining poverty, it does show that economic growth can provide an effective way of reducing poverty Chapter 8: Why isn’t the whole world developed? Proximate cause of prosperity K A H Fundamental causes of prosperity Root reasons for the differences in the proximate causes The fundamental causes are ultimately the deep determinants of economic development Fundamental causes hypotheses 1) Geography hypothesis Claims differences in geography, climate, and ecology are ultimately responsible for the large differences in prosperity 2) Culture hypothesis Claims that different values and cultural beliefs are ultimately responsible for the large differences in prosperity 3) Institutions hypothesis Claims that differences in the way societies organize themselves and shape the incentives of individuals and businesses are ultimately responsible for the large differences in prosperity ***Economic Institutions o Aspects of society’s rules that concern economic transactions Economic Institutions include: Protection of property rights and ownership Impartiality of the justice system Financial arrangements between savers and borrowers Regulations concerning new businesses or occupations Institutions have 3 important features I. They are determined by individuals II. They place constraints on behavior III. They shape human behavior by determining incentives Inclusive economic institutions Institutions that support and encourage economic transactions such as: Protect private property Uphold law and order Allow and enforce private contracts Allow free entry into new lines of business and occupations Extractive economic institutions Institutions that remove resources from the economy such as: Do not protect property Do not enforce private contracts Interfere with workings of markets Restrict entry into new lines of business and occupations Political Institutions The aspects of society’s rules that determine who holds political power and what types of constraints are placed on them Extractive economic institutions tend to support inefficient firms and prevent entrepreneurs with new ideas from entering the market