MACROECONOMICSAND THE GLOBAL BUSINESS ENVIRONMENT
The Wealth of NationsThe Supply Side
3-2
Key Concepts
Economic Growth Total output (GDP) Growth Importance of Trend Growth Output per capita growth
Elements of Growth Labor Capital Total Factor Productivity
3-3
Economic Growth
Economic Growth: an increase over time in the quantity of goods and services produced by an economy
Rate of economic growth Real GDP: adjusts for inflation Real GDP per capita: adjusts for size of population
Why do we care about economic growth? Affects human welfare A little increase in growth over a long period makes a
huge difference Trend growth more important than business cycle
3-4
The Importance of Economic Growth
U.S. Counterfactual History
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
1789
1797
1805
1813
1821
1829
1837
1845
1853
1861
1869
1877
1885
1893
1901
1909
1917
1925
1933
1941
1949
1957
1965
1973
1981
1989
1997
Per
Capit
a I
nco
me
Actual Real GDP Per Capita 1% Higher Real GDP Per Capita
Business Cycles still occur, but trend is key difference
3-5
The Importance of Economic Growth
Is higher trend growth possible? Thomas Malthus (1798): No
finite resources => limit to both economic and population growth (i.e. more people, less economic growth)
“Malthusian Perspective”
Economist Perspective- “Half a Billion Americans?”(8/22/02 ): Yes More people, more economic growth How do we reconcile different views on growth?
What view does the empirical evidence support?
3-6
The Importance of Economic Growth
3-7
The Evidence
Population Growth and Economic Growth
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998
Billions
of $
0
1
2
3
4
5
6
7
Billions
of P
eople
World Real GDP Population
3-8
The Evidence
World GDP Per Capita
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998
3-9
The Evidence
Real GDP Per Capita, 0-1998 AD
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
0 500 1000 1500 1550 1600 1650 1700 1750 1820 1870 1913 1950 1973 1998
Western Europe Eastern Europe Former USSR Total Western OffshootsLatin America Japan Asia Africa
3-10
The Evidence
Economic Growth: China vs. Western Europe
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
1000 1150 1300 1400 1500 1820 1913 1950 2001
Per
Capit
a G
DP
China West Europe
3-11
The Evidence
3-12
The Evidence
Real Per Capita GDP
3-13
Evidence does suggest higher trend growth possible for many countries
Evidence also indicates that wide range of growth rates for many countries
Why the difference? Why do some countries take off when others do not?
Again, important question since even a little difference over a long time makes a big impact
The Evidence
3-14
Benefits of Economic Growth
Growing population Sustain more people
Life expectancy Longer lives, more accomplishments
Improved standards of living Higher income levels, afford more leisure
Poverty reduction A function of both inequality and economic growth
Recent emphasis on increasing growth Inequality may not change
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
2004 Real Per Capita GDP (PPP)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
United States
Japa
nKor
ea
Trinidad
and To
bago
Mex
ico
Braz
il
China
Egyp
t
Pakista
n
Mon
golia
Hait
i
Nepal
3-17
Explaining Differences in GDP per capita
GDP per capita =GDP
Population
GDP Hours Number Employed Labor Force
Hours Number Employed Labor Force Population
Labor ProductivityLabor Productivity
Average Hours WorkedAverage Hours WorkedEmployment RateEmployment Rate Labor Force
Participation Rate
Labor ForceParticipation Rate
3-18
Explaining Differences in GDP per capita (2001)
Country
GDP per Capita ($PPP)
Hourly Productivity
($PPP)
Average Hours Worked
Employment Rate
Participation Rate
U.S. 33869 38.28 1821 0.952 0.51Japan 25480 27.96 1821 0.949 0.53Korea 15226 13.66 2447 0.961 0.47Denmark 28360 37.28 1482 0.957 0.54France 24230 39.27 1532 0.915 0.44Germany 25427 36.67 1467 0.92 0.51Italy 25055 38.29 1606 0.904 0.45Netherlands 27337 40.08 1346 0.976 0.52Norway 30691 43.86 1364 0.964 0.53Sweden 25580 32.65 1603 0.95 0.51U.K. 24819 30.92 1711 0.949 0.49
GDP Hours Number Employed Labor Force
Hours Number Employed Labor Force Population GDP per
capita
•U.S. success more than labor productivity: avg. hours worked, employment rate, & participation rate important
•Two policy implications: focus on factors that (1) boost labor productivity and (2) increase labor market flexibility
•However, only increases in labor productivity can produced sustained increased in GDP per capita
3-19
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
3-20
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)
3-21
Production Function
Output = TFP Capital Stocka Labor Hours(1-a)
Real GDP
Total Factor Productivity
A parameter (a number, 0 < a < 1)
•Total factor productivity (TFP) measures how effectively the inputs are turned into output•True impact of capital and labor depend on their marginal product:
how much output will the next additional input add to output•diminishing marginal returns: holding other inputs and TFP fixed, the
marginal product of an input increases at a decreasing rate
3-22
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
3-23
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
3-24
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
3-25
Implications for labor productivity
Output = TFP Capital Stocka Labor Hours(1-a)
Labor Productivity
aGDP Capital
TFPLabor Hours Labor Hours
Changes in Labor Productivity(1) Total Factor Productivity(2) Capital per Labor Hour
3-26
Implications for Labor Productivity
implies…
% Labor Productivity = % TFP %Capital
aLabor Hour
aGDP Capital
TFPLabor Hours Labor Hours
3-27
Capital Stock per labor hour
Lab
or P
rodu
ctiv
ity
500 1000
8
12
Labor Productivity = TFP (Capital Stock/Labor Hours)a
3-28
Capital Stock per Labor Hour
Labor Productivity
k1
y1
y2
Output/Labor Hour = TFP (Capital/Labor Hour)a
Increase in TFP
3-29
3-30
3-31
Labor Productivity Decomposition
0.19
0.69
0.510.43
0.57
0
0.5
1
1.5
2
2.5
3
1800-1855 1855-1890 1890-1927 1929-1966 1966-1989
Labor Productivity TFP contribution Capital Stock/Labor
U.S. Labor Productivity Decomposition
3-32
Growth in Output
Increase in labor supply May have no impact on GDP per capita Not sustainable Diminishing returns
Increase in capital stock Must increase at faster rate than labor &
depreciation Diminishing returns
Increase in TFP No diminishing returns in this framework
Intensive vs. extensive economic growth More of the same growth vs. more growth with less
resources
3-33
Growth Accounting
Output = TFP Capital Stocka Labor Hours(1-a)
Production Function
Take the logarithms, and then changes in the logarithms%∆ Output = %∆TFP + a x %∆Capital Stock + (1-a) x %∆ Labor Hours
Steps
•Find percent change in capital stock and labor inputs multiplied by their weights
•Find percent change in output
•Difference between two or the residual is the percent change in total factor productivity
3-34
Growth accounting for Japan, Germany, the UK, and the United States, 1913–1950.
3-35
Growth accounting for Japan, Germany, the UK, and the United States, 1950–1973.
3-36
Growth accounting for Japan, Germany, the UK, and the United States, 1973–1992.
3-37
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
3-38
Growth Accounting
Japan Capital growth important through out Labor, TFP important ’50 – ’73
US TFP important until ’73 Labor important after ’73 thru mid 1990s Productivity strengthens in mid1990s
UK and Germany rely less on labor
3-39
Growth AccountingAsian Tigers, 1966 - 1990
3-40
China vs. India 1993-2004
3-41
Growth accounting in emerging markets, 1960–1994.
3-42
Summary
Importance of Growth Sources of Growth
GDP per capita Hourly productivity Number of hours worked
Productivity Capital Accumulation TFP
Growth Accounting