Macroeconomic in the long-run

Nội dung text: Macroeconomic in the long-run

1. MACROECONOMIC IN THE LONG-RUN 2.1 Production and growth 2.2 Saving, Investment & Financial system 2.3 The Basic tools of Finance 2.4 Unemployment Institute of International Education
2. 2.1 Production and growth ▪ What are the facts about living standards and growth rates around the world? ▪ Why does productivity matter for living standards? ▪ What determines productivity and its growth rate? ▪ How can public policy affect growth and living standards? Institute of International Education
3. A typical family with all their possessions in the U.K., an advanced economy 2016: GDP per capita: $39,900 Life expectancy: 81 years Adult literacy 99%
4. A typical family with all their possessions in Mexico, a middle income country 2016: GDP per capita: $8,200 Life expectancy: 77 years Adult literacy: 94.5%
5. A typical family with all their possessions in Mali, a poor country 2016 GDP per capita: $780 Life expectancy: 58 years Adult literacy: 33%
6. Economic Growth Computing of economic growth: by % changes in real GDP Yt − Yt−1 gt = 100% Yt−1 While
7. Productivity ▪ Recall one of the Ten Principles from Chap. 1: A country’s standard of living depends on its ability to produce goods & services. ▪ This ability depends on productivity, the average quantity of goods & services produced per unit of labor input. ▪ Y = real GDP = quantity of output produced L = quantity of labor so productivity = Y/L (output per worker) Institute of International Education
8. Determinants of Productivity – Physical capital • Stock of equipment and structures – Human capital • Knowledge and skills that workers acquire through education, training, and experience – Natural resources • Nature, such as land, rivers, mineral deposits – Technological knowledge • Knowing the best ways to produce • Innovations or Steve Jobs’ “think different” Institute of International Education
9. Physical Capital Per Worker ▪ The stock of equipment and structures used to produce goods & services is called [physical] capital, denoted K. ▪ K/L = capital per worker. ▪ Productivity is higher when the average worker has more capital (machines, equipment, etc.). Institute of International Education
10. Human Capital Per Worker ▪ Human capital (H): the knowledge and skills workers acquire through education, training, and experience ▪ H/L = the average worker’s human capital ▪ Productivity is higher when the average worker has more human capital (education, skills, etc.). Institute of International Education
11. Natural Resources Per Worker ▪ Natural resources (N): the inputs into production that nature provides, e.g., land, water ▪ Natural resources take two forms: renewable and nonrenewable. ▪ Other things equal, more N allows a country to produce more Y. Institute of International Education
12. Technological Knowledge ▪ Technological knowledge: society’s understanding of the best ways to produce g&s. ▪ Technological knowledge takes many forms • Common knowledge: after one person uses it, everyone becomes aware of it. E.g.: Henry Ford and the assembly line • Proprietary: it is known only by the company that discovers it. E.g.: Coca Cola and soft drinks’ recipe Institute of International Education
13. Tech. Knowledge vs. Human Capital ▪ Technological knowledge refers to society’s understanding of how to produce g&s. ▪ Human capital results from the effort people expend to acquire this knowledge. ▪ Both are important for productivity. Institute of International Education
14. The Production Function ▪ The production function is a graph or equation showing the relation between output and inputs: Y = A F(L, K, H, N) F( ) – a function that shows how inputs are combined to produce output “A” – the level of technology ▪ “A” multiplies the function F( ), so improvements in technology (increases in “A”) allow more output (Y) to be produced from any given combination of inputs. Institute of International Education
15. The Production Function Y = A F(L, K, H, N) ▪ If we multiply each input by 1/L, then output is multiplied by 1/L: Y/L = A F(1, K/L, H/L, N/L) ▪ This equation shows that productivity (output per worker) depends on: ▪ the level of technology (A) ▪ physical capital per worker ▪ human capital per worker ▪ natural resources per worker Institute of International Education
16. Economic Growth and Public Policy ▪ Encourage saving and investment. ▪ Encourage investment from abroad ▪ Encourage education and training. ▪ Establish secure property rights and maintain political stability. ▪ Promote free trade. ▪ Promote research and development. Institute of International Education
17. Saving and Investment ▪ We can boost productivity by increasing K, which requires more investment in resources. ▪ But, producing more K requires producing fewer consumption goods. ▪ Reducing consumption = increasing saving. ▪ Encouraging saving and investment is one way that a government can encourage growth and, in the long run, raise the economy’s living standard. Institute of International Education
18. Diminishing Returns and the Catch-Up Effect ▪ When government implement policies that raise saving and investment. Then K will rise, causing productivity and living standards to rise. ▪ But this faster growth is temporary, due to diminishing returns to capital: As K rises, the extra output from an additional unit of K falls . Institute of International Education
19. The Production Function & Diminishing Returns Y/L If workersOutput have perlittle K, giving themworker more increases(productivity) their productivity a lot. If workers already have a lot of K, giving them more increases productivity fairly little. K/L In the long run, the higher saving rate leads to a higher level of productivity but not to higher growth in capital variables. Capital per worker Institute of International Education
20. The catch-up effect: the property whereby poor countries tend to grow more rapidly than rich ones Y/L Rich country’s growth Poor country’s growth K/L Poor country starts here Rich country starts here Institute of International Education
21. Catch-Up Effect ▪ Over 1960-1990, the U.S. and S. Korea devoted a similar share of GDP to investment. ▪ But growth over this time was > 6% in Korea and only 2% in the U.S. ▪ Explanation: the catch-up effect. In 1960, K/L was far smaller in Korea than in the U.S., hence Korea grew faster. Institute of International Education
22. Investment from Abroad ▪ To raise K/L, the government can also encourage ▪ foreign direct investment: a capital investment (e.g., factory) that is owned & operated by a foreign entity ▪ foreign portfolio investment: a capital investment financed with foreign money but operated by domestic residents ▪ Some of the returns from these investments flow back to the foreign countries that supplied the funds in form of profit. Institute of International Education
23. Education ▪ Increase productivity by promoting education – investment in human capital (H). ▪ Public schools, subsidized loans for college ▪ Education has significant effects: In the U.S., each year of schooling raises a worker’s wage by 10%. ▪ But investing in H also involves a tradeoff between the present & future: Spending a year in school requires sacrificing a year’s wages now to have higher wages later. Institute of International Education
24. Education ▪ Human capital conveys positive externalities. ▪ An externality is the effect of one person’s actions on the well-being of other parties. ▪ One problem facing some poor countries is the brain drain – and this offers policymakers a dilemma. - rich countries having the best systems of higher education can offer abroad students better education. - brain drain will reduce the poor nation’s stock of human capital even further. Institute of International Education
25. Health and Nutrition ▪ Healthier workers are more productive. ▪ Improved health from better nutrition has been a significant factor in long-run economic growth ▪ In countries with significant malnourishment, raising workers’ caloric intake raises productivity: ▪ 30% of Great Britain’s growth from 1790-1980 was due to improved nutrition. ▪ The causal link between health and wealth runs in both directions Institute of International Education
26. Health and Nutrition ▪ The causal link between health and wealth runs in both directions – Poor countries are poor • Because their populations are not healthy – Populations are not healthy • Because they are poor and cannot afford better healthcare and nutrition Institute of International Education
27. Property Rights and Political Stability ▪ Recall: Markets are usually a good way to organize economic activity. ▪ The price system allocates resources to their most efficient uses. ▪ This requires respect for property rights, the ability of people to exercise authority over the resources they own. Institute of International Education
28. Property Rights and Political Stability ▪ In many poor countries, the justice system doesn’t work very well: ▪ Contracts aren’t always enforced ▪ Fraud, corruption often go unpunished ▪ Firms must bribe government officials for permits ▪ Political instability creates uncertainty over whether property rights will be protected in the future. Institute of International Education
29. Free Trade ▪ Inward-oriented policies (e.g., tariffs, limits on investment from abroad) aim to raise living standards by avoiding interaction with other countries. ▪ Outward-oriented policies (e.g., the elimination of restrictions on trade or foreign investment) promote integration with the world economy. Institute of International Education
30. Free Trade ▪ Recall: Trade can make everyone better off. ▪ Trade has similar effects as discovering new technologies – it improves productivity and living standards. ▪ Countries with inward-oriented policies have generally failed to create growth. ▪ E.g.: Argentina during the 20th century. ▪ Countries with outward-oriented policies have often succeeded. ▪ E.g., South Korea, Singapore, Taiwan after 1960. Institute of International Education
31. Research and Development ▪ Technological progress is the main reason why living standards rise over the long run. ▪ One reason is that knowledge is a public good: Ideas can be shared freely, increasing the productivity of others. ▪ Policies to promote tech. progress: ▪ Patent laws ▪ Government support ▪ Grants for basic research at universities Institute of International Education
32. Population Growth Does more population help growth? - Larger population means more workers, but also more consumers - Thinning out available resources & capital - Lower productivity and income - Poorer countries tend to have higher population growth Institute of International Education