Intro to Macroeconomics Chapter 7

What does growth rate Measure?

Growth Rate measures how rapidly real income per person grew in the typical year.

How do you calculate labor productivity in a certain year?

Labor productive of (said year)=(Output of product in set year/Labor hours put into producing is said year)

Investment from abroad

_Another way for a country to invest in new capital -Foreign direct investment: Capital investment that is owned and operate by a foreign entity -Foreign Portfolio investment: Investment finances with foreign money but operated by domestic residents

What re the three different ways that population growth may affect living standards?

1.Stretching natural resources 2.Diluting the capital stock 3.Promoting technological progress

Property Rights and economics growth

• To foster economic growth - Protect property rights (the ability of people to exercise authority over the resources they own) • Prerequisite for the price system to work • Courts: enforce property rights -Promote political stability

Free Trade

• Trade has similar effects as discovering new technologies - Improves productivity and living standards • Countries with inward -oriented policies - Have generally failed to create growth: Argentina throughout the 20th century. • Countries with outward-oriented policies - Have often succeeded: South Korea, Singapore, Taiwan

How do you calculate output/productivity per worker

output per worker= (output opf the good with the said physical capital/number of workers)

Stretching natural resources

- 200 years ago, Malthus argued that population growth will: • Strain society's ability to provide for itself • Mankind: doomed to forever live in poverty - Since then, the world population has increased sixfold and living standards increased • Malthus failed to account for technological progress and productivity growth

1960-1990: the U.S. and S. Korea - similar share of GDP devoted to investment

- Expect: similar growth performance - Growth was >6% in Korea; only 2% in the U.S. - The catch-up effect: in 1960, K/L was far smaller in Korea than in the U.S., hence Korea grew faster

Policies that raise saving and investment & Diminishing Returns?

- Fewer resources are used to make consumption goods - More resources: to make capital goods - K increases, rising productivity and living standards - This faster growth is temporary, due to diminishing returns to capital: As K rises, the extra output from an additional unit of K falls.

Diluting the capital stock

- High population growth (higher L) - Spread the capital stock more thinly (lower K/L) - Lower productivity and living standards • Many developing countries - policies: - Government regulation (China's one child law 1980-2015) - Increased awareness of birth control - Equal opportunities for women (Promote female literacy to raise opportunity cost of having babies)

Workers in the Production Function?

- If workers already have a lot of K, giving them more increases productivity fairly little -If workers have little K, giving them more increases their productivity a lot

What does a society's standard of living depend on?

- Its ability to produce goods and services - Productivity depends on • Physical capital per worker, human capital per worker, natural resources per worker, and technological knowledge

What is the virtuous circle.

- Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth

What's the Vicious Circle in poor countries

- 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

Promoting Technological progress

- World population growth = Engine for technological progress and economic prosperity • More people = More scientists, more inventors, more engineers = More frequent discoveries • Michael Kremer, human history: - Growth rates increased as the world's population increased - More populated regions grew faster than less populated ones

What does a country's standard of living depend on?

-A country's standard of living depends on its ability to produce goods and services.

Inward-oriented policies

-Aim to raise living standards by avoiding interaction with other countries -Examples: tariffs, limit on investment from abroad

Why does the ranking of countries by Income change substantially over time?

-Because of the differences in the growth rate • Poor countries are not necessarily doomed to poverty forever, e.g. Japan incomes were low in 1860 and are quite high now • Rich countries can't take their status for granted: They may be overtaken by poorer but faster-growing countries

Constant returns to scale

-Changing all inputs by the same percentage causes outputs to change by the percentage. • Doubling all inputs (multiplying each by 2) causes output to double: 2Y = A × F(2L, 2K, 2H, 2N) • Increasing all inputs 10% (multiplying each by 1.1) causes output to increase by 10%: 1.1Y= A × F(1.1L, 1.1K, 1.1H, 1.1N)

What can be done to raise future productivity in regards to savings and Investment

-Encourage savings and investments -invest more current resources in the production of capital, K • Producing more capital requires producing fewer consumption goods • Trade-off: sacrifice current consumption to increase future consumption • Reducing consumption = increasing saving • This extra saving funds the production of investment goods

Knowledge is a public Good because:

-Ideas can be shared freely, increasing the productivity of many

Natura resources, (N)

-Input into production that nature provides (land, rivers, and mineral deposits)

Health Care expenditures

-Is a type of investment in human capital: healthier workers are more productive • In countries with significant malnourishment, raising workers' caloric intake raises productivity: - 1962-1995, caloric consumption rose 44% in S. Korea, and economic growth was spectacular. - Nobel winner Robert Fogel: 30% of Great Britain's growth from 1790-1980 was due to improved nutrition

Human Capital, (H)

-Knowledge and skills workers acquire through education, training, and experience

Natural resources per worker, (N/L)

-Other things equal, more N allows a country to produce more Y -An increase in N/L causes an increase in Y/L

What re policies to promote technological progress:

-Patent laws -Tax incentive or direct support for private sector R&D -Grants for basic research at universities

Physical capital per worker, (K/L)

-Productivity is higher when the average worker has more capital (Machines,equipment, etc.) -an increase in K/L causes an increase in Y/L

Human Capital per worker, (H/L)

-Productivity is higher when the average worker has more human capital (education, skills, etc.) -An increase in H/L causes an increase in Y/L.

Outwards-oriented policies

-Promote integration with the world economy -Example: elimination of restrictions on trade or foreign investment

Productivity, Y/L

-Quantity of goods and services produced from each unit of labor input -Key Determinant of Living standards: when a nation's workers arevery productive, real GDP is large and incomes are high

Technological Knowledge,( A)

-Society understanding of the best way to produce a good and services - Common knowledge: after one person uses it, everyone becomes aware of it - Proprietary: it is known only by the company that discovers it - Any advance in knowledge that boosts productivity and allows society to get more output from its resources

What are the Benefits from investment from abroad?

-Some benefits flow back to the foreign capital owners -Increase the economy's stock of capital -Higher Productivity and higher wages -State-of-the-art technologies developed in other countries -Especially good for poor countries that cannot generate enough saving to fund investment projects themselves

Physical capital, (K)

-Stock of equipment and structures used to produce goods and services

The Catch-up effect

-The property whereby countries that start off poor tend to grow more rapidly

Why is so much of Africa poor? Many of the poorest people on the planet live in sub-Saharan Africa. • In 2017, GDP per person in this region (measured in 2011 dollars) was only $3,489 (23% of the world average). • 41% of population lives on less than $1.90 per day Discuss some of the reasons (determinants of productivity) that may explain the low economic development in this area.

1. Low capital investment 2. Low educational attainment 3. Poor health 4. High population growth 5. Geographic disadvantages 6. Restricted freedom 7. High levels of corruption 8. The legacy of colonization

Why are Natural resources not necessary for an economy to be highly productive ?

Although natural resources can be important, they are not necessary for an economy to be highly productive in producing goods and services. SImilar to Japan which is one of the richest countries they import and trade to get what they need to be productive.

Education

Education= investments in human capital - Gap between wages of educated and uneducated workers - Opportunity cost of education: wages forgone - Confers positive externalities - Subsidies to human -capital investment: public education. Problem for poor countries: Brain Drain

How do you calculate physical capital per worker in (a particular year)?

Physical capital per worker(in a particular year)=(Physical capital in that year/labor force in that year)

What is required to produce Human Capital?

Producing human capital requires inputs in the form of teachers, libraries, and student time.

Production Function

Production Func. Y=A x F(L,K,H,N) - A graph or equation showing the relation between output and inputs - F( ) is a function that shows how inputs are combined to produce output - "A" is 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.

What's the main reason why Living standards rise over the long run?

Technological progress

when does brain drain occur?

The brain drain occurs as the best and brightest workers from poor countries leave for higher compensation and better living standards in rich countries. As the skill level of the workforce in less developed countries dissipates along with their most skilled professionals, the countries become even poorer and less capable of developing technological knowledge and enhancing productivity.

What can the economy's income also be seen as?

The economy's output

What happens when productivity grows rapidly?

The living standards also grow rapidly.

How are some ways that differences are reflected in quality of Life and standard of Living amonst countries?

• Differences are reflected in large differences in the quality of life: nutrition, housing, healthcare, life expectancy, and so on

What's the key determinant of growth in Living standards?

• Growth in productivity is the key determinant of growth in living standards - A nation can enjoy a high standard of living only if it can produce a large quantity of goods and services

Y/L = A × F(1, K/L, H/L, N/L)

• 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 (Y/L, output per worker) depends on: - The level of technology, A - Physical capital per worker, K/L - Human capital per worker, H/L - Natural resources per worker, N/L

What happens when there is population growth?

• Large population - More workers to produce goods and services: larger total output of goods and services - More consumers

What happens when there is a lack of property rights?

• Major problem: lack of property rights - Contracts are hard to enforce - Fraud, corruption often goes unpunished - Firms must bribe government officials for permits

What affects can political stability cause?

• Political instability (e.g., frequent revolutions, coups) - Creates uncertainty over whether property rights will be protected in the future

Are Natural Resources a Limit to Growth?

• Some argue that population growth - Is depleting the Earth's non-renewable resources - And thus will limit growth in living standards • But technological progress often yields ways to avoid these limits: - Hybrid cars use less gas - Better insulation in homes reduces the energy required to heat or cool them • Market economy, scarcity is reflected in market prices - If the world were running out of natural resources, their prices would be rising over time - In real terms, the prices of most natural resources are stable or falling - It appears that our ability to conserve these resources is growing more rapidly than their supplies are dwindling

Technological Knowledge VS. Human Capital

• Technological knowledge - Refers to society's understanding of how to produce goods and services • Human capital - Results from the effort people expend to acquire this knowledge • Both are important for productivity