MACROECONOMICSUNDERSTANDING THE GLOBAL ECONOMY

The Wealth of NationsThe Supply Side

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.

3-2

Key Concepts

GDP Growth Total output Output per capita

Elements of Growth Labor Capital Total Factor Productivity

3-3

The Importance of Economic Growth

"No society can surely be flourishing and happy, of which the far greater part of the

members are poor and miserable." --Adam Smith

3-4

GDP Growth

An increase over time in the quantity of goods and services produced by an economy

Rate of growth Real GDP: adjusts for inflation Real GDP per capita: adjusts for size of

population

3-5

World GDP Growth by Century

0 to 10th

11th 12th 13th 14th 15th 16th 17th 18th 19th 20th

-50%

0%

50%

100%

150%

200%

250%

300%

350%

% change in GDP per capita over each century

3-6

Rise In GDP per capita by Region

AFRICA

ASIA

AUSTRALASIA

E. EURO

PE + F

ORM

ER USSR

LATIN

AM

ERICA

NORTH A

MERIC

A

W. E

UROPE

0

5000

10000

15000

20000

25000

30000

35000

1820

2010

GD

P p

er C

apit

a (1

990

$)

3-7

Relative importance of trend growth and business cycles

3-8

Importance of Growth

Growing population Life expectancy Improving standards of living Poverty reduction

3-9

-6%

-4%

-2%

0%

2%

4%

6%

0 5,000 10,000 15,000 20,000 25,000

GDP per capita, US $$

Gro

wth

rat

e, 1

980

– 20

00 (

per

annu

m)

Growth rate and Level of GDP

3-10

-6%

-4%

-2%

0%

2%

4%

6%

-5000 5000 15000 25000

GDP per capita, US $$

Gro

wth

rat

e, 1

980

– 20

00 (

per

annu

m)

China

India

Points are weighted by size of population in 1980

Growth rate and Level of GDP

3-11

World GDP per capita and Life Expectancy

010

020

030

040

050

060

070

080

090

010

0011

0012

0013

0014

0015

0016

0017

0018

0019

0020

00100

1000

10000

0

10

20

30

40

50

60

70

GDP per Capita (LHS, Log Scale)

Life expectancy (RHS)

GD

P p

er c

apit

a (1

990

$)

Lif

e ex

pec

tan

cy a

t b

irth

(ye

ars)

3-12

World Population Growth

0 100 200 300 400 500 600 700 800 900 100011001200130014001500160017001800190020002100220023000

2000

4000

6000

8000

10000

Africa Europe

Latin America N. America

Oceania population

Mil

lio

ns

of

Peo

ple

3-13

Trends in Global Inequality

1820 1850 1870 1890 1910 1929 1950 1960 1970 1980 1992 20000

0.2

0.4

0.6

0.8

1

Between-country inequality

3-14

Trends in Global Poverty

Population with income of less than $1 a day

1981 1984 1987 1990 1993 1996 1999 2002 20050

200

400

600

800

1000

1200

1400

1600

ChinaRest of E. AsiaLatin AmericaIndia Rest of S. AsiaSub-Saharan AfricaRest of Worldm

illio

ns

of

pe

op

le

3-15

Inequality and Growth

0.20

0.30

0.40

0.50

0.60

0.70

0.80

-10 -5 0 5 10 15 20

Growth Rate

Mor

e In

equa

lity

3-16

Which enhances welfare?

Eliminate business cycle movements Enhance growth rate

3-17

1999 GDP per capita

(US = $30600)

Years to attain US 1999 level Actual growth rate

(1990-99)1% growth 3% growth 6% growth 9% growth

Germany$25350

20 years 7 years 4 years 3 years 1.5%

UK $22640 32 years 11 years 6 years 4 years 2.1%

Brazil $4420 196 years 66 years 34 years 23 years 1.7%

China $780 370 years 145 years 64 years 44 years 9.8%

Ethiopia $100 577 years 194 years 99 years 67 years 2.2%

Compounding is a wonderful thing…

3-18

Analysis of Growth

Capital(buildings,

infrastructure and

machines)

Capital(buildings,

infrastructure and

machines)

Total Factor Productivity

(technological knowledge

and efficiency)

Total Factor Productivity

(technological knowledge

and efficiency)

Output (GDP)Output (GDP)

Labor(Hours worked, number

of workers)

Labor(Hours worked, number

of workers)

3-19

GDP per capita

GDP per capita =GDP

Population

GDP Hours Number Employed Labor Force

Hours Number Employed Labor Force Population

Labor ProductivityLabor Productivity

Average Hours WorkedAverage Hours WorkedEmployment RateEmployment Rate Labor Force

Participation Rate

Labor ForceParticipation Rate

3-20

GDP per capita

Labor productivity Average hours worked Employment rate = 1 – Unemployment Rate Labor force participation rate

3-21

US Population by Labor Market Status (2011)

Not working age23%

Not in labor force27%

Unemployed5%

Employed45%

3-22

Decomposition of GDP per capita (2008)

3-23

Total Employment

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

8000

80000

800000

UK

USA

Japan

Italy

France

Canada

Th

ou

san

ds

of

Peo

ple

3-24

Average Annual Hours Worked

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

1300

1500

1700

1900

2100

2300

Canada France

Japan Sweden

UK W. Germany

USA

Av

era

ge

an

nu

al h

ou

rs w

ork

ed

3-25

Role of Inputs

More inputs means more output Diminishing returns

1 worker = $10 in output 2 workers = $18 in output 3 workers = $24 in output

Marginal return is$8 in outputMarginal return is $6 in output

3-26

The Production Function

3-27

Production Function

Output = TFP Capital Stocka Labor Hours(1-a)

Real GDP

Total Factor Productivity

A parameter (a number, 0 < a < 1)

3-28

Cobb-Douglas example

0

100

200

300

400

500

600

700

800

900

1000

0 500 1000 1500 2000 2500

Rea

l G

DP

Hours worked

TFP = 1Capital = 500a=0.6

3-29

0

100

200

300

400

500

600

700

800

900

1000

0 500 1000 1500 2000 2500

Hours Worked

Rea

l GD

P0.6 0.4(500) (Labor Hours)Output

3-30

0

200

400

600

800

1000

1200

1400

1600

1800

0 500 1000 1500 2000 2500

Capital Stock

Output

0.6 0.4(Capital Stock) (1000)Output

3-31

Implications for labor productivity

Output = TFP Capital Stocka Labor Hours(1-a)

Labor Productivity

aGDP Capital

TFPLabor Hours Labor Hours

3-32

Changes in Labor Productivity

Total Factor Productivity Capital per Labor Hour

3-33

Capital Stock per labor hour

Lab

or P

rodu

ctiv

ity

500 1000

8

12

Labor Productivity = TFP (Capital Stock/Labor Hours)a

3-34

Output Growth

% GDP per capita = % Labor Productivity

and

% Labor Productivity = % TFP %Capital

aLabor Hour

3-35

Capital Stock per Labor Hour

Labor Productivity

k1

y1

y2

Output/Labor Hour = TFP (Capital/Labor Hour)a

Increase in TFP

3-36

Growth in Output

Increase in labor supply May have no impact on GDP per capita Not sustainable

Increase in capital stock Must increase at faster rate than labor

Increase in TFP No diminishing returns in this framework

3-37

Growth accounting for Japan, Germany, the UK, and the United States, 1913–1950.

Japan UK US Germany0

1

2

3

TFP Labor Capital

3-38

Growth accounting for Japan, Germany, the UK, and the United States, 1950–1985.

Japan UK US Germany0

1

2

3

4

5

6

7

8

TFP Labor Capital

3-39

Growth accounting for Japan, Germany, the UK, and the United States, 1985–2008.

Australia Canada France Germany Italy Japan Sweden UK US

-1

0

1

2

3

4

TFP Labour Capital

3-40

Growth AccountingAsian Tigers, 1966 - 1990

3-41

Europe and Asia

  Total Output: Of Which

    Capital Labor TFP

Golden Age 1950-73        

France 5.0% 1.6% 0.3% 3.1%

UK 3.0% 1.6% 0.2% 1.2%

W. Germany 6.0% 2.2% 0.5% 3.3%

Asian Miracle 1960-94

       

China 6.8% 2.3% 1.9% 2.6%

Hong Kong 7.3% 2.8% 2.1% 2.4%

Indonesia 5.6% 2.9% 1.9% 0.8%

Korea 8.3% 4.3% 2.5% 1.5%

Thailand 7.5% 3.7% 2.0% 1.8%

Singapore 8.5% 4.4% 2.2% 1.5%

Europe relied on capital and TFP – Asian countries have relied on capital

3-42

Growth Accounting

Japan Capital growth important through out Labor, TFP important ’50 – ’85

US TFP important until ’85 Labor important after ’85

UK and Germany rely less on labor

3-43

Growth accounting in the BRIC Economies.

Brazil China India Russia0

1

2

3

4

5

6

7

8

9

10TFP Labour Capital

3-44

Summary

Importance of Growth Sources of Growth

GDP per capita Hourly productivity Number of hours worked

Productivity Capital Accumulation TFP

Growth Accounting

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