Download Lecture 26 - Cornell University

Trade & Growth
Lecture 26
Dr. Jennifer P. Wissink
©2017 Jennifer P. Wissink, all rights reserved.
May 10, 2017
Funny Story
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Guido Menzio, an Italian economist from the University of Pennsylvania
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Ph.D. Economics, Northwestern University Evanston, IL, 2005
Thesis: The Wage Policy of the Firm: Micro-foundations and Macro Implications
Committee Chairperson: Professor Dale T. Mortensen
Carlo Alberto Medal for Best Italian Economist Under 40, 2015
Ten ways to tell you might be sitting next to an economist
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http://www.economist.com/blogs/buttonwood/2016/05/airline-safety
1. He refuses to listen to the safety announcement because "in the long run, we're all dead"
2. He keeps telling you that "there is no such thing" as a "complimentary refreshment service"
3. He avoids prolonged conversation with you because he has a "rational expectation" that you're
an idiot since you chose the middle seat
4. But he offers to trade his aisle seat for yours in a competitive auction with the woman sitting
behind you
5. He plonks his elbow on the arm rest because space has a "higher marginal utility" for him than for
you
6. When he elbows you in the ribs, he says he is simply trying to "nudge" you into better behaviour
7. When he opens the overhead locker, a copy of Thomas Piketty's "Capital in the 21st century" falls
out and hits you on the head
8. But then he uses the book as a footrest
9. He only relaxes when the plane reaches 35,000 feet because then it's in "general equilibrium"
10. Spends all the flight scribbling Greek letters into a notebook. Turns out it's not a series of
equations; he's part of the IMF negotiating team en route to Athens
11. Adds an extra point to a "top 10 list" because he believes in "quantitative reasoning"
Some Growth Numbers
TABLE 16.1 Growth of Real GDP: 1996–2013
Country
Average Growth Rates per Year,
Percentage Points, 1996–2013
United States
2.4
Japan
0.8
Germany
1.3
France
1.6
United Kingdom
2.1
China
9.6
India
6.8
Sub-Saharan Africa
5.6
Source: Economic Report of the President, 2015, Table B-4
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NOTES:
– The “catch up” theory states that the growth rates of less developed countries will
exceed the growth rates of developed countries, allowing the less developed
countries to catch up.
– The idea that gaps in national incomes tend to close over time is called “convergence
theory”.
– An economic historian coined the term the “advantages of backwardness” over 50
years ago to describe the phenomenon of less developed countries leaping ahead by
borrowing technology from more developed countries.
TABLE 17.7 Growth of Real GDP in the United States, 1871–2000
Period
Average
Growth
Rate Per Year
Period
Average
Growth
Rate Per Year
1871-1889
5.5
1950-1960
3.5
1889-1909
4.0
1960-1970
4.2
1909-1929
2.8
1970-1980
3.2
1929-1940
1.6
1980-1990
3.2
1940-1950
5.6
1990-2000
3.2
Sources: Historical Statistics of the United States: Colonial Times to 1970, Tables F47-70,
F98-124; U.S. Department of Commerce, Bureau of Economic Analysis.
Long-Run Growth
 Basic
Sources of Growth
– Human Capital
» More labor and the knowledge and skills acquired
by labor through education and experience.
– Real Economic “K”apital
» More K and Better K
» Capital Deepening: Increases in the stock of capital
per worker.
– Technological Progress
» More efficient ways of organizing economic affairs
that allow an economy to increase output without
increasing inputs.
Long-Run Growth Policies

Policies to Improve the Quality of Education

Policies to Increase the Saving Rate

Policies to Decrease Taxes

Policies to Stimulate Investment and Risk Taking

Policies to Increase Research and Development

Policies to Reduce Regulations

“Industrial Policy” - Government involvement in
the allocation of capital across manufacturing
sectors.
Sources of Economic Growth:
Increase in Labor Supply
Suppose GDP = Y = 3 × K1/3L2/3
Economic Growth from an Increase in Labor
More Output but Diminishing Returns and Lower Labor Productivity
Period
Quantity
of Labor
L
Quantity
of Capital
K
Total
Output
Y
Labor
Productivity
Y/L
Marginal Return
to Labor
ΔY/ΔL
1
100
100
300
3.0
̶
2
110
100
320
2.9
2.0
3
120
100
339
2.8
1.9
4
130
100
357
2.7
1.8
TABLE 16.3 Employment, Labor Force, and Population Growth,
1960–2014
MyEconLab Real-time data
Civilian
Noninstitutional
Population
16 and Older
(Millions)
1960
1970
1980
1990
2000
2010
2014
Total percentage change, 1960–
2014
Percentage change at annual rate
Employment
(Millions)
Civilian
Labor
Force
Number
(Millions)
Percentage
of Population
117.3
137.1
167.7
189.2
212.6
237.8
247.9
+113.4%
69.6
82.8
106.9
125.8
142.6
153.9
155.9
+124.0%
59.3
60.4
63.7
66.5
67.1
64.7
62.9
+1.4%
+1.5%
65.8
78.7
99.3
118.8
136.9
139.1
146.3
+122.3%
+1.5%
Source: Economic Report of the President, 2015, Table B-11.
Copyright © 2017 Pearson Education, Inc.
16-9
Sources of Economic Growth:
Increase in Physical Capital
Suppose GDP = Y = 3 × K1/3L2/3
Economic Growth from an Increase in Capital
More Output, Diminishing Returns to Added Capital, Higher Labor Productivity
Period
Quantity
of Labor
L
Quantity
of Capital
K
Total
Output
Y
Labor
Productivity
Y/L
Output
per Capital
Y/K
Marginal
Return to
Capital
ΔY/ΔK
1
100
100
300
3.0
3.0
̶
2
100
110
310
3.1
2.8
1.0
3
100
120
319
3.2
2.7
0.9
4
100
130
327
3.3
2.5
0.8
TABLE 16.5 Fixed Private Nonresidential Net Capital Stock, 1960–
2013 (Billions of 2009 Dollars)
Equipment
Structures
1960
706.1
3,451.3
1970
1,202.0
4,769.3
1980
1,994.0
6,294.8
1990
2,629.0
8,336.5
2000
4,039.4
9,808.9
2010
5,208.2
10,967.0
2013
5,605.8
11,151.8
Total percentage change, 1960–2013
+693.9%
+223.1%
Percentage change at an annual rate
+4.0%
+ 2.2%
Source: U.S. Department of Commerce, Bureau of Economic Analysis., Fixed Asset Tables
Between 1960 and 2013 the stock of equipment grew at an annual rate of 4.0% and the
stock of structures grew at an annual rate of 2.2%.
Notice that the growth rates of capital in this table are larger than the growth rates of
labor in Table 16.3. So, capital has grown relative to labor.
Copyright © 2017 Pearson Education, Inc.
16-11
Sources of Economic Growth:
Increase in the Quality of Labor Supply
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The level of educational attainment in the United States
has risen significantly since 1940.
As the quality of labor increases through more education,
labor productivity increases.
Policy makers in many developed economies are
concerned about their ability to continue to generate
growth through human capital improvements.
An interesting read...Is college worth it?
– http://www.economist.com/news/united-states/21600131-too-manydegrees-are-waste-money-return-higher-education-would-be-muchbetter
Sources of Economic Growth:
Increase in Quality of Labor Supply
 Is
it a good investment?
 Want to find Cornell?
 Check out the site PayScale.
– http://www.payscale.com/about/education-data/
TABLE 16.6 Years of School Completed by People Older Than 25
Years, 1940–2014
1940
Percentage with Less
Than 5 Years of
School
13.7
Percentage with 4
Years of High School
or More
24.5
Percentage with 4
Years of College
or More
4.6
1950
11.1
34.3
6.2
1960
8.3
41.1
7.7
1970
5.5
52.3
10.7
1980
3.6
66.5
16.2
1990
NA
77.6
21.3
2000
NA
84.1
25.6
2010
NA
87.1
29.9
2014
NA
88.1
32.0
NA = not available
Source: Statistical Abstract of the United States, 1990, Table 215, and 2012, Table 229, and Bureau of the Census,
2014, Table 2,Educational Attainment.
Copyright © 2017 Pearson Education, Inc.
16-14
Sources of Economic Growth:
U.S. Labor Productivity
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Output per hour of work, labor productivity is a simple measure of how much a typical
worker can produce given the amount of capital in the economy and the state of
technological progress.
From 1947 to the worldwide oil crisis in 1973, labor productivity grew rapidly.
Productivity growth fell in the remainder of the 1970s and slowly increased over the next
two decades.
Since 2007, productivity growth has also slowed from recent trends, partly due to the
recession.
Economists have used growth accounting to help explain these trends in productivity
growth in the United States. Economic research suggests that the oil shocks in the
1970s reduced technological progress but the information revolution in the 1980s and
1990s led to a resurgence of technological progress.
U.S. Annual Productivity
Growth,
1947–2011
SOURCE: Bureau of Labor Statistics,
2012.
Sources of Economic Growth:
Technological Change & Progress

Embodied Technical Change
– Technical change that results in an improvement in the quality of
capital. (e.g., store cash registers then and now)
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Disembodied Technical Change
– Technical change that results in a change in the production process.
(e.g., better organization of factory “floor”; market reforms)

Another Distinction
– Invention: An advance in knowledge.
– Innovation: The use of new knowledge to produce a new product or to
produce an existing product more efficiently.
i>clicker question: Which one of the following would be classified as an invention?
A.
B.
C.
D.
In 1899 the Bayer Company marketed acetylsalicylic acid as a pain reliever in powder form under the name Aspirin.
In 1907 James Spangler combined an old fan motor, a soap box, a broom stick, and a pillow case into a device
which was later acquired by William H. Hoover, president of the Hoover Company.
Beginning in the late 1950s, the field of nanoscience (or nanotechnology) emerged as scientists developed new
techniques for the manipulation of materials billionths of a meter wide.
In 2001 Eddie Bauer and other retailers introduce stain and wrinkle resistant slacks using fabric developed by
Greensboro, North Carolina based Nano-Tex, LLC. Attached to the fabric’s cotton fibers are molecular structures
that create an invisible barrier that causes moisture and stains to bead on top of the fabric and prevent absorption.
What Causes Technological
Progress? Many Say R&D
Research and Development as a
Percent of GDP, 1999
The United States spends more
total money than any other country
on research and development.
However, when the spending is
measured as a percentage of each
nation’s GDP, Japan spends more.
A big part of U.S. spending on
research and development is in
defense-related areas.
SOURCE: National Science
Foundation, National Patterns of
R&D Resources, 2002, Washington
D.C.
Can We Use Economic Analysis to Understand
the Drivers of Growth in Different Countries?
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India and China are the two most populous countries and have also grown very
rapidly in recent years.
From 1978 to 2004, GDP in China grew at the rate of 9.3 percent per year.
From 1978 to 2004, GDP in India grew at a lower rate of 5.4 percent per year.
Economists Barry Bosworth from the Brookings Institution and Susan Collins
from the University of Michigan used growth accounting to answer this question.
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China’s rapid growth was caused by more rapid accumulation of physical capital and
more rapid technological progress.
China invested much more in physical capital and was able to increase its
technological progress at a more rapid rate.
Growth and the Environment and
Issues of Sustainability
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Huge looming questions.
Is there climate change?
– What’s causing it?
» plants or plants?
– Who should do what about pollution?
» need to consider both consumption and production.
– What kinds of institutions and societal structures can be
utilized?
» Kyoto types of agreements?
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In 1997, the conference in Kyoto, Japan was widely considered a
breakthrough, producing an international treaty to limit emissions
of greenhouse gases.
» What will happen beyond Kyoto?
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Paris…?
Are we running out of resources?
– Oil?
– Fresh Water?
– Farmable Land?
The End - Amen
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Study hard.
Use the class web pages – stay informed.
Work loads of problems.
Eat well.
Take a walk once in a while.
Get some sleep.
Don’t survive on
And last but not least....
Thanks to YOU ALL for a great semester!!
And thanks to the TAs for all their hard
work.
Best of luck on all your finals. I am looking
for good things from you all in our final!!