Introduction to Macroeconomics

1
Introduction to Macroeconomics
2
Is the Business Cycle Dead?

• It would be imprudent, however, to presume that
  the business cycle has been purged from market
  economies so long as human expectations are
  subject to bouts of euphoria and disillusionment
  Alan Greenspan (February 17, 2000)
• What did it look like?

3
Chart 12
4
The economic Indicators
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Economic Environment and the Firm
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Dimensions of Economic Performance

• What are the economys objectives?
• Class Discussion

7
Dimensions of Economic Performance--What are the
economys objectives?

• Growth
• Full Employment
• Price Stability
• Balance of Payments Equilibrium
• Fair Income Distribution
• Quality of life and environment

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Dimensions of Economic Performance

• What are examples of contradictions between
  objectives?

9
Prioritizing the Economys Objectives

• voting for No. 1 etc.

10
Prioritizing the Economys Objectives

• Are the Objectives of Bush different from Gore?

11
Stabilization and Development

• Potential Growth and Actual Growth--The Business
  Cycle

Potential GDP
Actual GDP
12
Growth vs. Stabilization

• How does this relate to the question of the New
  versus the Bubble economy?

13
Measurement
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GDP--Three approaches to measuring GDP
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Income and Product Side of GDP

• Outlays Receipts
• Compensation of Employees (2-1) Personal
  Consumption Expend. (2-7)
• Proprietors' Income (2-2) Gross Private Domestic
  Invest. (5-5)
• Rental Income of Persons (2-3) Net Exports of
  Goods and Services
• Corporate Profits Exports (4-4)
• Dividends (2-4) less Imports (4-1)
• Undistributed Profits (5-2)
• Corporate Profits Taxes (3-2)
• Net Interest (2-5) Government consumption
  (3-1)
• Indirect Business Taxes (3-3) Government
  investment (3-2)
• Consumption of Fixed Capital (5-3)
• less Net Income Receipts from RoW (4-2)
• Gross Domestic Product Gross Domestic
  Product

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Prices
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Price Indexes
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Index Number formulas

• I t ?i wi (Pit / Pi0 ) 100
• ILit ? ((Pi0 Qi0)/ (?i
  (Pi0 Qi0)) (Pit / Pi0 ) 100)

ILit ?i(Pit Qi0) / ?i(Pi0 Qi0)
100 IPi ?i (Pit Qit ) / ?i(Pi0 Qit)
100
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Index number problems

• What kind of problems?
• Do they make a difference?

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What Measures for Business?
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Growth

• Why do we grow more rapidly at some times than at
  others?
• Why do some countries grow more rapidly than
  others?
• Is there a tendency for convergence?

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How to think about growth
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Production Possibilities--production function
with diminishing returns
Y/L
K/l
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Production Possibilities--production functions
shift from traditional to technologically advanced
GDP/L
C
Advanced Technology
B
Traditional Technology
A
K/L
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Cobb-Douglas Production Function

• Y At La K(1-a) where a is the labor share of
  GDP and (1-a) is the capital share

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Traditional Growth Theory

• dY/Y - adL/L -(1-a)dK/K dA/A
• change in Y inputs of labor and capital
  technical change

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Broadening the definition of inputs

• Labor Education
• Labor Experience (learning by doing)
• Research and Development

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Endogenous Growth and the New Economy

• Constant returns and externalities
• Increasing returns to scale

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The Evolution of Competitive Advantage
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The S-Curve of East Asian Growth
GDP 000 per capita
US
Ja
Si
20-
Hk
Ko
Tai
10-
Ma
Th
5-
Ch
Ph
2-
10
20
30
40
50
Years from Start
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The Development Ladder--Stages
Stage 1 Stage 2 Stage 3 Stage 4
Primary Products Labor Intensive
Manufactures Hi Tech Manufactures Services
(high level)
Abundant cheap land and labor Low Cost
Labor Capital Intensive, Technically
Sophisticated Products Domestic and International
Services
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The Stages of the Product Cycle Process
1950-65 1965-1980 1980-1995
1995-2010
China Korea Taiwan Philippines Malaysia Indonesia
Thailand Singapore
Stage 1
Indonesia Philippines Vietnam
Thailand Malaysia China Indonesia Philippines
Laos Cambodia Myanmar
Japan Hong Kong
Taiwan Singapore Hong Kong Korea Japan
Stage 2
Thailand Malaysia China
Indonesia Philippines Vietnam Thailand China
Taiwan Singapore Hong Kong Korea Japan
Stage3
Malaysia Taiwan Korea Japan
Stage 4
Singapore HongKong
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A The Flying Geese Process?
Ja
Ko
Twn
Ma
Sng
Tha
Indo
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A Relay Race?
Industry
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The Role of Government A discussion

• Government

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Other considerations

• Capital Markets
• Scale
• Direct Foreign Investment
• Multinationals

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The Nidas Case

• Does it support the development ladder thesis?
  How?
• What is likely to be the next desitation of
  production?
• How can Nidas deal with the problems posed by
  political activists?