Principles of Macroeconomics 3250:201

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Principles of Macroeconomics 3250201

• Richard W. Stratton

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Administration

• 6 graded assignments this week
• Homework 07, 08, 09, 10
• Essay 02
• CBT Test 03 (Friday - Monday)
• 4 graded assignments next week
• Homework 11, 12
• Essay 03
• CBT Test 04 (Friday - Monday)

Decision Tree
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Decision Tree

• Student questions
• Measuring Growth
• Determinants of Economic Growth
• Theories of Growth
• Worksheet 07 Economic Growth

Q8
Q11
Q15
4
Review Readings

• Compare and discuss questions on worksheet or
  chapter 10
• write down top 5 questions for the Group
• Class
• Discuss questions rotating among Groups

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Decision Tree

• Student questions
• Measuring Growth
• Determinants of Economic Growth
• Theories of Growth
• Worksheet 07 Economic Growth

Q8
Q11
Q15
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Calculating growth rate

• Calculation of Growth Rate for 2001

Year Nominal GDP GDP Deflator Real GDP Growth Rate
1998 8,781.5 103.20
1999 9,274.3 104.69
2000 9,824.6 106.89
2001 10,082.2 109.42
2002 10,442.1 110.66
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Calculating growth rate

• Step 1 Calculate Real GDP

Year Nominal GDP GDP Deflator Real GDP Growth Rate
1998 8,781.5 103.20 8,509.2
1999 9,274.3 104.69 8,858.8
2000 9,824.6 106.89 9,191.3
2001 10,082.2 109.42 9,214.2
2002 10,442.1 110.66 9,436.2
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Calculating growth rate

• Step 2 Calculate Growth Rate

Year Nominal GDP GDP Deflator Real GDP Growth Rate
1998 8,781.5 103.20 8,509.2 ---
1999 9,274.3 104.69 8,858.8 8859 8509 8509
2000 9,824.6 106.89 9,191.3 9191 8859 8859
2001 10,082.2 109.42 9,214.2 9214 9191 9191
2002 10,442.1 110.66 9,436.2 9436 9214 9214
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Calculating growth rate

• Step 2a Calculate Growth Rate

Year Nominal GDP GDP Deflator Real GDP Growth Rate
1998 8,781.5 103.20 8,509.2 --
1999 9,274.3 104.69 8,858.8 4.1
2000 9,824.6 106.89 9,191.3 3.7
2001 10,082.2 109.42 9,214.2 0.3
2002 10,442.1 110.66 9,436.2 2.4
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Growth in Standard of Living

• The standard of living depends on
• Real GDP per person
• Real GDP per person
• Real GDP divided by the population

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Growth in Standard of Living

• The growth rate of real GDP per person can be
  calculated by using the formula

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Decision Tree

• Student questions
• Measuring Growth
• Determinants of Economic Growth
• Theories of Growth
• Worksheet 07 Economic Growth

Q8
Q11
Q15
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Economic Growth

• the limits to growth on this planet will be
  reached sometime within the next 100 years. The
  most probable result will be a sudden and
  uncontrollable decline in both population and
  industrial capacity.
• Comment

(The Limits to Growth, Meadows et al. Universe,
1972)
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Determinants of Growth

• What causes growth?
• Is growth sustainable?
• Assume GDP is produced using three categories of
  inputs labor, capital, and raw materials.

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Determinants of Growth

• If the number of aggregate hours of labor used
  increased, real GDP would ____________.
• If the capital used in production increased, real
  GDP would ____________.

increase
increase
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Determinants of Growth

• If the amount of raw materials used in production
  increased, real GDP would _____________.
• If labor productivity increased and the number of
  aggregate hours remained the same, real GDP would
  _____________.

increase
increase
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Graphing changes

• Axes?

Real GDP
Aggregate Production
Aggregate Hours
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Graphing changes

• Increase aggregate hours

Real GDP
Aggregate Production
Aggregate Hours
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Graphing changes

• Increase use of capital

Real GDP
Aggregate Production
Aggregate Hours
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Graphing changes

• Increase of raw materials

Real GDP
Aggregate Production
Aggregate Hours
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Graphing changes

• Increase labor productivity

Real GDP
Aggregate Production
Aggregate Hours
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Extensive / Intensive Growth

• Extensive and Intensive Growth

Action Intensive Extensive
Increase aggregate hours of labor X
Investment in Physical Capital (Increase use of capital) X
Increase use of raw materials X
Increase labor productivity X
Increase total productivity X
Investment in Human Capital X
Discovery of new technologies X
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Sustainable Growth

• Are there limits to extensive growth?
• Are there limits to intensive growth?

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Decision Tree

• Student questions
• Measuring Growth
• Determinants of Economic Growth
• Theories of Growth
• Worksheet 07 Economic Growth

Q8
Q11
Q15
25
Economic Growth

• Growth Theories
• Compare and contrast
• Classical growth theory
• Neo-classical growth theory
• New growth theory

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Comparing Growth Theories
Term, Person or Concept Classical Neo-Classical New Theory
Growth rate of GDP Measured as change in Real GDP Measured as change in Real GDP Measured as change in Real GDP
Technical innovation
Labor productivity
Population growth
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Comparing Growth Theories
Term, Person or Concept Classical Neo-Classical New Theory
Growth rate of GDP Measured as change in Real GDP Measured as change in Real GDP Measured as change in Real GDP
Technical innovation Random Temp Random HK growth RD
Labor productivity Temp Sustainable random Sustainable predicatable
Population growth Temp Limiting Not limiting Womens Choice Not limiting Womens Choice
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Comparing Growth Theories
Term, Person or Concept Classical Neo-Classical New Theory
Productivity growth
Wage rate for women
Death rate
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Comparing Growth Theories
Term, Person or Concept Classical Neo-Classical New Theory
Productivity growth Regresses to Subsistence Unending growth Unending growth
Wage rate for women Ignored Women wages part. increase Women wages part. increase
Death rate Decrease with growth Decrease with growth Decrease with growth
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Comparing Growth Theories
Term, Person or Concept Classical Neo-Classical New Theory
Human capital investment
Investment in R D
The role of profits
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Comparing Growth Theories
Term, Person or Concept Classical Neo-Classical New Theory
Human capital investment Ignored Random Unrelated to growth Dependent on Choice
Investment in R D Ignored Ignored Choice if profitable
The role of profits Ignored Ignored Primary driver
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Sustainable Growth

• Are there limits to growth?
• Are there limits to extensive growth?
• Are there limits to intensive growth?

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Summary - Classical

• Classical Growth Theory
• Increased productivity ?
• Increased GDP ?
• Reduced deaths and increased births ?
• Increased population ?
• Decrease in GDP per person
• Population growth limits increases in human
  welfare

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Summary - Classical

• Classical Key features
• Increases in labor productivity are random and
  temporary
• Changes in birth rate and life expectancy primary
  determinants of population
• Increases in population limited by subsistence
  level

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Summary - Classical

• Classical Growth Theory Prediction
• Global Economy stagnates at subsistence level

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Summary - Neoclassical

• Neo-Classical Growth Theory
• Technological advances ?
• Increased labor productivity ?
• Increase GDP ?
• Reduce deaths ?
• Reduce birth rates (womens opt. cost)
• Growth rate population growth productivity
  growth accumulation of human capital

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Summary - Neoclassical

• Neo-Classical Key features
• Technological advances occur by chance, but are
  sustainable
• Change in population influenced by death rate
  birth rate declines
• Growth rate population growth productivity
  growth accumulation of human capital

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Summary - Neoclassical

• Neo-Classical Prediction
• Global Economy grows at a rate equal to
  technological change. National economies tend to
  converge.

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Summary New Theory

• New Growth Theory
• Education, RD, profit determine technological
  advances ?
• Increased labor productivity ?
• Increase GDP per person ?
• Reduce death rates ?
• Reduce birth rates (womens opt. cost)

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Summary New Theory

• New Theory Key features
• Decisions on education, RD, and profit potential
  determine the rate of technological advance
• Change in population influenced by death rate
  birth rate declines
• Growth rate population growth productivity
  growth accumulation of human capital

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Summary New Theory

• New Theory Prediction
• National economies grow at rates dependent on
  incentives (save, invest, etc.)
• They will not necessarily converge.

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Decision Tree

• Student questions
• Measuring Growth
• Determinants of Economic Growth
• Theories of Growth
• Worksheet 07 Economic Growth

Q8
Q11
Q15
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Worksheet MC questions

• Which of the following is likely to increase the
  poverty in a country?
• A decrease in population over time .
• A decrease in the real GDP growth rate over time
  .
• A decrease in the inflation rate over time.
• An increase in the real GDP per person growth
  rate over time .

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Worksheet MC questions

• If the U.S. population grew at a 0.9 percent
  during 1999 and real GDP grew at a 4.4 percent
  during the same period, what was the growth rate
  of real GDP per person?
• 3.5 percent
• 3.5 percent
• 4.0 percent
• 5.3 percent

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Worksheet MC questions

• Last year, in a nation far to the South, real GDP
  was 90 million and 900,000 workers were
  employed. This year real GDP is 100 million and
  950,000 workers are employed. Hence, labor
  productivity has
• increased.
• decreased.
• remained constant.

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Worksheet MC questions

• If Country As real GDP grows at a rate of 14
  percent per year, how many years will it take for
  Country As real GDP to double ?
• 5
• 7
• 10
• 30

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Worksheet MC questions

• Neoclassical growth theory predicts that real GDP
  will
• remain at the subsistence level .
• grow at a rate that is determined by the pace of
  technological change .
• grow but at a rate that will slow as time
  progresses and population growth increases.
• continue to grow because of the choices people
  make in the pursuit of profit .

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Worksheet T/F questions

• Support for structuring taxes to encourage
  innovation is found in neoclassical growth
  theory.
• False In neoclassical growth theory, innovation
  and technological change are assumed random.
  Therefore, tax policies will not increase either.
  Support for this policy is found in the new
  growth theory.

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Worksheet T/F questions

• New growth theory predicts that national growth
  rates will slowly converge over time .
• False The convergence prediction is usually
  associated with the neoclassical theory of growth
  and the lack of evidence to support that
  predication was a stimulus to the development of
  the new theory of growth. Technically, the
  classical theory also predicts convergence, to
  subsistence levels.

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Worksheet Real GDP
Oz Lilliput
Real GDP growth rate 5 3
Population growth rate 2 1

1. What is the per capita real GDP growth rate of Oz?

5 - 2 3
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Worksheet Real GDP
Oz Lilliput
Real GDP growth rate 5 3
Population growth rate 2 1

1. How many years will it take the real GDP per
   capita of Oz to double, at this rate of growth?

Use the rule of 70
70 / 3 23.3 years
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Worksheet Real GDP
Oz Lilliput
Real GDP growth rate 5 3
Population growth rate 2 1

1. If real GDP in Oz is currently 20 larger than in
   Lilliput, how many years will it take Lilliput to
   catch up to Oz?

Lilliput will never catch up
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Worksheet Real GDP
2002 data Country 1 Country 2 Country 3
Real GDP 8.444 113.7 133.8
Growth rate of real GDP - 0.6 6.9 1.6
Real GDP per capita 30,200 29,300 25,800
Population 280,798 3,924,140 5,190,785
Population growth rate 0.49 1.03 0.14

1. Which country has the highest standard of living?

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Worksheet Real GDP
2002 data Country 1 Country 2 Country 3
Real GDP 8.444 113.7 133.8
Growth rate of real GDP - 0.6 6.9 1.6
Real GDP per capita 30,200 29,300 25,800
Population 280,798 3,924,140 5,190,785
Population growth rate 0.49 1.03 0.14

1. Which country has the fastest growing economy?

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Worksheet Real GDP
2002 data Country 1 Country 2 Country 3
Real GDP 8.444 113.7 133.8
Growth rate of real GDP - 0.6 6.9 1.6
Real GDP per capita 30,200 29,300 25,800
Population 280,798 3,924,140 5,190,785
Population growth rate 0.49 1.03 0.14

1. What is the growth rate in the standard of living
   in country 3?

1.6 - 0.14 1.46
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Worksheet Real GDP
2002 data Country (Iceland) Country (Ireland) Country (Finland)
Real GDP 8.444 113.7 133.8
Growth rate of real GDP - 0.6 6.9 1.6
Real GDP per capita 30,200 29,300 25,800
Population 280,798 3,924,140 5,190,785
Population growth rate 0.49 1.03 0.14

1. If these trends continue in country 1, what will
   the real GDP per capita be in 2003?

-0.6 - 0.49 -1.09 It will be 1.09
LOWER 30,200 (0.0109)30200 0.989130200
29,871
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Worksheet Match the Theory
Classical Neoclassical New Growth Theory

• Growth is measured by the percentage change in
  real GDP
• Technical innovation results from choices
• Human capital investment is key to increases in
  labor productivity

All three
New Growth Theory
New Growth Theory
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Worksheet Match the Theory
Classical Neoclassical New Growth Theory

• Prosperity leads to decreases in death rates and
  increases in birth rates
• Prosperity leads to decreases in death rates and
  in birth rates
• Productivity growth is essential to increases in
  living standards

Classical
Neoclassical
New Growth Theory
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Worksheet Match the Theory
Classical Neoclassical New Growth Theory

• The relationship between wage rates for women and
  birth rates is key
• Increased productivity leads to no improvement in
  living standards
• Investment in R D increases economic growth

Neoclassical New Growth Theory
Classical
New Growth Theory
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Worksheet Match the Theory
Classical Neoclassical New Growth Theory

• The role of profits in the economy is an
  important component
• Romer one of the major proponents
• Malthus one of the major proponents

New Growth Theory
New Growth Theory
Classical
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Decision Tree

• Student questions
• Measuring Growth
• Determinants of Economic Growth
• Theories of Growth
• Worksheet 07 Economic Growth

Q8
Q11
Q15