MGE 4'1

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Loïc Sadoulet Macroeconomics in a Global
Economy P3 Jan-Feb. 2004
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Last time C I G

• Consumption
• Investment
• Government Spending

• Current disposable income
• Expected future disposable income / Wealth
• Importance of consumer confidence
• Desired investment f (profitability) Tobins
  q
• Supply of investment funds aggregate savings
• Cost of investment funds interest rate
• Stimulates economy
• Reduces aggregate savings effect on r and S

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Aggregate Savings and Investment

• Recall
• Income Ag. Demand
• Rewriting
• Use of Savings Identity

Closed Economy S I
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Equilibrium Interest Rate
S Y C G
Real interest rate
r
I
Investment / Savings
I(r) S(r)
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Interest Rate and Gvt Deficits
S
S Y C G
Real interest rate
r
r
I
Investment / Savings
I(r)
I(r)
Gvt deficits crowd-out private I
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Interest Rate and Business Confidence
Fall in business confidence
r
I
I(r)
Note low interest rates are not always good sign!
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Influencing Economic GrowthThe Aggregate Demand
Multiplier Effect
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The Aggregate Demand Multiplier Effect Round 1,
Step 1
DG100
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The Aggregate Demand Multiplier Effect Round 1,
Step 2
DG100
DY100
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The Aggregate Demand Multiplier Effect Round 1,
Step 3
DG100
DY100
DY100
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The Aggregate Demand Multiplier Effect Round 1,
Step 4
DC mpc DY
DG100
DY100
DY100
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The Aggregate Demand Multiplier Effect
DC mpc DY
DG100
DY100
mpc 100
DY100
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The Aggregate Demand Multiplier Effect Round 2
DC mpc DY
DG100
DY100 mpc 100
DY100 mpc 100
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The Aggregate Demand Multiplier Effect Round 3
DC mpc DY
DG100
DY100 mpc 100
(mpc)2100
DY100 mpc 100
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The Aggregate DemandMultiplier Effect

• The final impact on output of DG
• Note mpc is between 0 and 1, so that

multiplier effect
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A bit more complicated because of

• Taxes
• Imports
• Crowding out
• Exchange rates (as we will see later)

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Taxes and the Multiplier Effect
DC mpc DY
DG100
DY100
mpc(1-t)100
DY100(1 t)

DT DYt
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A bit more complicated because of

• Taxes
• Imports
• Crowding out
• Exchange rates (as we will see later)

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A bit more complicated because of
Reduces multiplier effect

• Taxes
• Imports
• Crowding out
• Exchange rates

Reduces multiplier effect (leakage)
Reduces multiplier effect (I falls)
Reduces (appreciation reduces X)
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II. Economic Growth

• Changes in autonomous spending affect short-term
  growth
• Government spending
• Changes in confidence (consumer, business)
• What influences long-term growth?

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Long-term growth rates




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What affects growth rates?
Resources(decreasing returns)
Total Factor Productivity
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III. Productivity

• Productivity how much an economy can produce
  with its resources
• How do economists measure productivity?
• Short answer badly
• Long answer
• Productivity (A) is the residual growth (after L
  and K growth)

estimated
data
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The Asian Miracle
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The productivity slowdown(1980s)
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Explanations for the Productivity Slowdown

• Measurement error better is harder to count
  than more
• (underestimation of GDP growth)
• Oil prices temporary slowdown due to more
  expensive inputs
• (not convincing no productivity boom in 80s)
• Human and legal environment
• (worker health and safety, decline in worker
  skills)
• Ran out of easy inventions (harder adapt
  commercially)

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The New Economy

• Presentations
• Singapore 50 of businesses online by 2003
• Question Should we stay on course?

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Importance of B2B online
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The New Economy

• Evidence that TFP has grown 1995-2000
• Information (product awareness, description)
• Reduction of transactions costs
• Speed
• Integrated systems
• More efficient links in supply chain

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The New Economy

• Evidence that TFP has grown 1995-2000. However
• Mostly concentrated on computer industry and
  telecom (12 of GDP)
• Little effect on rest of economy
• What Intel giveth, Microsoft taketh away
• Most IT investment represents competition for
  market share
• (BN vs. Amazon redistribution of sales, not
  new ones)
• Not sustainable computer power is cheaper, but
  diminishing returns
• Online consumption peak hours during office hours

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IV. Economic policies to promote growth

• Targeting government spending towards improving
  the infrastructure of the economy.
• Improving human capital. Recent studies have
  found that a more educated labor force is
  associated strongly with a rapid increase in the
  national income.
• Funding of research and development activities.
• Advances in technology ultimately explain
  sustained growth
• Patent laws to promote RD
• Important role of externalities.

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Economic policies to promote growth

• Microeconomic policies
• Privatization, increasing competition,
  deregulation, reducing the distortionary effect
  of taxation.
• Backbone of any restructuring program in
  transition economies or in developing countries.
• Industrial policy. (Very controversial)
• Policies aimed at influencing the pattern of
  industrial development
• Aggressive strategy to promote dvt of some
  industries
• Reduced taxes, subsidies, etc.

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Economic policies to promote growth

• Industrial policy. (continued)
• In general, governments cannot determine better
  than the market which industries will be the
  winners
• Might exist some special cases warranting
  government intervention
• Borrowing constraints
• Start-up cannot borrow
• Development of very high-tech needs long-term RD
• Externalities/Spillovers
• E.g. development of better chip stimulates
  improvements in other companies and industries

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Summary Session 4

• Sources of growth
• Labor
• Capital Accumulation
• Total factor productivity growth
• Diminishing returns to resources ? sustainable
  growth needs productivity growth
• Little productivity growth 1960-1995

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Summary Session 4

• New TFP from new economy, but
• Mostly in IT-related manufacturing
• Most of the new economy is redistribution of
  old economy
• Not sustainable diminishing returns
• Policies to promote productivity growth
• Investment in infrastructure
• RD
• Reduction of distortions to investment (taxes,
  corruption)
• Industrial policy (?) controversial