Download Growth

MACROECONOMICS
UNDERSTANDING THE GLOBAL ECONOMY
The Wealth of Nations
The Supply Side
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
3-2
Key Concepts
 GDP Growth


Total output
Output per capita
 Elements of Growth



Labor
Capital
Total Factor Productivity
3-3
The Importance of Economic Growth
"No society can surely be flourishing and
happy, of which the far greater part of the
members are poor and miserable."
--Adam Smith
3-4
GDP Growth
 An increase over time in the quantity of goods
and services produced by an economy
 Rate of growth


Real GDP: adjusts for inflation
Real GDP per capita: adjusts for size of
population
3-5
World GDP Growth by Century
350%
300%
250%
200%
150%
100%
50%
0%
-50%
0 to
10th
11th
12th
13th
14th
15th
16th
17th
18th
% change in GDP per capita over each century
19th
20th
3-6
Rise In GDP per capita by Region
35000
GDP per Capita (1990 $)
30000
25000
20000
15000
10000
1820
2010
5000
0
3-7
Relative importance of trend
growth and business cycles
3-8
Importance of Growth
 Growing population
 Life expectancy
 Improving standards of living
 Poverty reduction
3-9
Growth rate, 1980 – 2000 (per annum)
Growth rate and Level of GDP
6%
4%
2%
0%
-2%
-4%
-6%
0
5,000
10,000
15,000
20,000
GDP per capita, US $$
25,000
3-10
Growth rate, 1980 – 2000 (per annum)
Growth rate and Level of GDP
China
6%
India
4%
2%
0%
-5000
-2%
5000
15000
25000
-4%
-6%
GDP per capita, US $$
Points are weighted by size of population in 1980
3-11
World GDP per capita and Life
Expectancy
10000
70
GDP per Capita (LHS, Log Scale)
GDP per capita (1990 $)
Life expectancy (RHS)
50
40
1000
30
20
10
100
0
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Life expectancy at birth (years)
60
3-12
World Population Growth
10000
Asia
Africa
Europe
Latin America
N. America
Oceania
Millions of People
8000
6000
4000
2000
0
3-13
Trends in Global Inequality
1
0.8
Global inequality
0.6
0.4
Within-country
inequality
0.2
0
1820
Between-country
inequality
1850
1870
1890
1910
1929
1950
1960
1970
1980
1992
2000
3-14
Trends in Global Poverty
1600
1400
millions of people
1200
China
1000
Rest of E. Asia
Latin America
800
India
Rest of S. Asia
600
Sub-Saharan Africa
Rest of World
400
200
0
1981
1984
1987
1990
1993
1996
1999
2002
2005
Population with income of less than $1 a day
3-15
Inequality and Growth
More Inequality 
0.80
0.70
0.60
0.50
0.40
0.30
0.20
-10
-5
0
5
10
Growth Rate
15
20
3-16
Which enhances welfare?
 Eliminate business cycle movements
 Enhance growth rate
3-17
Compounding is a wonderful thing…
1999 GDP per
capita
(US = $30600)
Years to attain US 1999 level
Actual
growth
rate
(1990-99)
1% growth
3% growth
6% growth
9% growth
20 years
7 years
4 years
3 years
1.5%
$22640
32 years
11 years
6 years
4 years
2.1%
Brazil
$4420
196 years
66 years
34 years
23 years
1.7%
China
$780
370 years
145 years
64 years
44 years
9.8%
$100
577 years
194 years
99 years
67 years
2.2%
Germany
UK
Ethiopia
$25350
3-18
Analysis of Growth
Capital
(buildings,
infrastructure
and
machines)
Output (GDP)
Labor
(Hours worked, number
of workers)
Total Factor
Productivity
(technological
knowledge
and
efficiency)
3-19
GDP per capita
GDP per capita =
GDP
Population
GDP
Hours
Number Employed Labor Force




Hours Number Employed
Labor Force
Population
Labor Productivity
Average Hours Worked
Employment Rate
Labor Force
Participation Rate
3-20
GDP per capita
 Labor productivity
 Average hours worked
 Employment rate = 1 – Unemployment Rate
 Labor force participation rate
3-21
US Population by Labor Market
Status (2011)
Not working age
23%
Employed
45%
Unemployed
5%
Not in labor
force
27%
3-22
Decomposition of GDP per capita
(2008)
3-23
Total Employment
256000
Thousands of People
128000
64000
UK
USA
Japan
32000
Italy
France
Canada
16000
8000
3-24
Average Annual Hours Worked
Average annual hours worked
2300
2100
1900
1700
1500
1300
Canada
France
Japan
Sweden
UK
W. Germany
USA
3-25
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 output
Marginal return is
$6 in output
3-26
The Production Function
3-27
Production Function
Output = TFP  Capital Stocka  Labor Hours(1-a)
Real GDP
Total Factor Productivity
A parameter
(a number, 0 < a < 1)
3-28
Cobb-Douglas example
1000
Real GDP
900
800
700
TFP = 1
Capital = 500
a=0.6
600
500
400
300
200
100
0
0
500
1000
1500
2000
2500
Hours worked
3-29
Output  (500)0.6  (Labor Hours)0.4
Real GDP
1000
900
800
700
600
500
400
300
200
100
0
0
500
1000
1500
2000
2500
Hours Worked
3-30
Output  (Capital Stock)0.6  (1000)0.4
1800
Output
1600
1400
1200
1000
800
600
400
200
0
0
500
1000
1500
2000
2500
Capital Stock
3-31
Implications for labor productivity
Output = TFP  Capital Stocka  Labor Hours(1-a)
 Capital 
GDP
 TFP  

Labor Hours
 Labor Hours 
Labor Productivity
a
3-32
Changes in Labor Productivity
 Total Factor Productivity
 Capital per Labor Hour
3-33
Labor Productivity
Labor Productivity = TFP  (Capital Stock/Labor Hours)a
12
8
500
1000
Capital Stock per labor hour
3-34
Output Growth
% GDP per capita = % Labor Productivity
and
 Capital 
% Labor Productivity = % TFP  a  % 

 Labor Hour 
3-35
Increase in TFP
Output/Labor Hour = TFP  (Capital/Labor Hour)a
Labor Productivity
y2
y1
k1
Capital Stock per Labor Hour
3-36
Growth in Output
 Increase in labor supply
 May have no impact on GDP per capita
 Not sustainable
 Increase in capital stock

Must increase at faster rate than labor
 Increase in TFP

No diminishing returns in this framework
3-37
Growth accounting for Japan, Germany, the UK, and the United
States, 1913–1950.
3
TFP
Labor
Capital
2
1
0
Japan
UK
US
Germany
3-38
Growth accounting for Japan, Germany, the UK, and the United
States, 1950–1985.
8
TFP
Labor
Capital
7
6
5
4
3
2
1
0
Japan
UK
US
Germany
3-39
Growth accounting for Japan, Germany, the UK, and the United
States, 1985–2008.
4
TFP
Labour
Capital
3
2
1
0
Australia
-1
Canada
France
Germany
Italy
Japan
Sweden
UK
US
3-40
Growth Accounting
Asian Tigers, 1966 - 1990
3-41
Europe and Asia
Total Output:
Of Which
Capital
Labor
TFP
Golden Age 1950-73
France
UK
W. Germany
Asian Miracle 1960-94
5.0%
3.0%
6.0%
1.6%
1.6%
2.2%
0.3%
0.2%
0.5%
3.1%
1.2%
3.3%
China
Hong Kong
Indonesia
Korea
Thailand
Singapore
6.8%
7.3%
5.6%
8.3%
7.5%
8.5%
2.3%
2.8%
2.9%
4.3%
3.7%
4.4%
1.9%
2.1%
1.9%
2.5%
2.0%
2.2%
2.6%
2.4%
0.8%
1.5%
1.8%
1.5%
Europe relied on capital and TFP
– Asian countries have relied on capital
3-42
Growth Accounting
 Japan


Capital growth important through out
Labor, TFP important ’50 – ’85
 US


TFP important until ’85
Labor important after ’85
 UK and Germany rely less on labor
3-43
Growth accounting in the BRIC
Economies.
10
TFP
9
Labour
Capital
8
7
6
5
4
3
2
1
0
Brazil
China
India
Russia
3-44
Summary
 Importance of Growth
 Sources of Growth
 GDP per capita
 Hourly productivity
 Number of hours worked
 Productivity
 Capital Accumulation
 TFP
 Growth Accounting
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