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CEMUS Educa+on/Uppsala Centre for Sustainable Development • Fall Semester 2012 Basic Concepts of Economics • (some of) the basic principles • incorpora3ng the principles into a basic model of economic growth • neoclassical theory, and how it corrected some wrong assump3ons • policy implica3ons (for economic development) • modern theory and the new central role of ideas and intellectual property • intellectual property rigths (IPR) • IPR in the globalized economy, the effect of trade and implica3ons for technological transfer and catching-‐up of developing coutries [email protected] Economic Principles Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Economic principles… How people make decisions? Principle #1 – People Face Tradeoffs • Scarcity • Efficiency (vs. equity) Principle #2 – The Cost of Something is What You Give Up to Get It • Opportunity cost Economic principles… How people make decisions? Principle #3 – Rational People Think at the Margin • Marginal changes • Marginal costs and benefits Principle #4 – People React to Incentives • When marginal costs or benefits change • people react Economic principles… How people interact? Principle #5 – Trade Can Make Everyone Better Off • Comparative advantage • Specialization • Winners and losers Principle #4 – Markets Are Usually a Good Way to Organize Economic Activity • The invisible hand Economic principles… How people interact? Principle #7 – Governments Can Sometimes Improve Market Outcomes • Market failure • Externality • Market power How the economy as a whole works? Principle #8 – A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services • Factors of production • Productivity A Framework for Analysis Thinking guide – how to analyze and weigh the rela3ve importance of different factors leading to a certain phenomenon? • Economic model as a simplified representa3on of reality – how is Y determined? How does a change in X affect Y? The effect of policy? • Model limita3ons: improper assump3ons, oversimplifica3on, mathema3cal intractability • Data is used to: Test economic models Determine parameters and magnitude of policy effects (quan3ta3ve analysis) Suggest how to model reality… • Data limita3ons: there’s always a lack of data, some things are hard to measure, experimenta3on is very limited in social sciences A Framework for Analysis • How to examine the data? – scaUer plot Rela3onship between La3tude and Income per Capita outlier -‐ Does correla3on imply causa3on? No Rela3onship between Income per Capita and Popula3on Growth outlier A Framework for Analysis • Interpre3ng correla3ons: X causes Y Y causes X Z causes both X and Y – omiUed variable bias (mul3ple regression and instrumental variable to deal with the bias) Example: Fogel’s Map of a Poten3al Water Transport Network for 1890 Copyright © 2009 Pearson Educa3on, Inc. Publishing as Pearson Addison-‐Wesley The Facts to Be Explained Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Facts… Differences in Income across countries • 7 billion people in the world live under strikingly different circumstances • 20% of the popula3on receives 58% of world income • Why are some countries so rich, other so poor? Facts… Differences in Growth Rates of Income • Varying growth experiences of countries through history – some on parallel tracks, some catching-‐up, other falling behind • Small differences in growth rates have large effects over 3me Facts… Differences in Growth Rates of Income • Today’s growth rates are rela3vely recent phenomena, there was virtualy NO long-‐run growth before the end of 19th century • World growth pace accelera3on • Grouping of countries, several ”jump-‐type” experiences The Role of Capital Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Physical capital, Income Levels and Growth • strong positive correlation between GDP per worker and Capital per Worker GDP and Capital per Worker, 2005 • Not clear if there’s causation • If there is, which way does it go? • We need a model to study the role of physical capital Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Physical capital, Income Levels and Growth The Nature of Capital • productive (input factor) • produced (investment accumulation) • limited use (rivalrous) • earns return (productive and rivalrous • wears out (depreciation) incentive to pay for its use) A Production Function with Diminishing Marginal Product of Capital Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley The Steady State of the Solow Model Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Determination of Steady-State Weight Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Effect of Increasing the Investment Rate on the Steady State: Can different investment rates explain different GDPpc? Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Predicted Versus Actual GDP per Worker Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley The Role of Ideas Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Role of Productivity in Determining Growth, 1970–2005 dispersion Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Variation in factors smaller than variation in productivities – so, the latter may be a more influential source of large variation in income pc The role of Technology in Growth • growth accounting shows substantial impact of productivity growth on growth in living standards • productivity – technology and efficiency • first natural candidate to cause productivity growth – technological progress • Where does the technological progress come from? • Can differences in technology explain differences in productivity across countries? The Nature of Technological Progress • technology determines the way in which factors of production are combined to produce output • technological change allows for overcoming the barriers imposed by diminishing returns • production function exibits decreasing marginal returns to each factor but increasing returns to scale! Why so? technology is made of ideas The Nature of Technological Progress • ideas are NONrivalrous • ideas have a certain degree of excludability The Nature of Technological Progress …ideas are NONrivalrous • other production inputs are objects, technology is made of ideas which transfer across people relatively easy • second user does not make the first one worse off • all users benefit equaly effectively …ideas have a certain degree of excludability • a risk of worsening the incentives to create new ideas Technology Creation Researchers and Research Spending, 2005 Technology creation requires investment… • fairly recent phenomenon • government as active players • intellectual property rights Technology Creation Strong IPR protection is necessary for people to invest in technology creation? Investment in Technology Creation Profit consideration monopoly profits due to patent protection • how much advantage an invention provides? • size of the market • duration of advantage • R&D uncertainty Creative destruction Ideas in a globalized world Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley The technological transfer The story of leaks, matches and traps • Solow predicts capital flows to high rate countries – true, but high rate countries are not those where capital is low but where technology is high • Why are the incentives for technology investment low? • How to get out of the trap if there are no incentives to invest in technology? The technological transfer • Two ways to acquire technology: Innovation Imitation • Will consider two countries of the same size, but different techology level, difficulty of R&D and share of resources devoted to R&D Cost of Copying for the Follower Country • difficulty of copying decreases with the technological gap – technology less complex, it’s been out for some time so people learn about it • with no gap, it’s equal to difficulty of innovation; with infinite gap, no cost Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Steady State in the Two-Country Model • when gap is positive but small, leader has to be growing faster as it invests more in R&D while the innovation and imitation difficulty is not so different, so the gap grows • as gap gets sufficiently large, even with lower invesment in R&D, the follower can overpass the leader’s growth rate due to large reduction in the imitation difficulty; however, as that happens, the gap starts shrinking and the only SS is where the technological progress has the same pace • if Copyright research investments are different (leader invests more), the gap is positive in the SS © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley Technology transfer and adoption Source: Comin and Hobijn (2010), AER Technology blocking • Tiberius and unbreakable glass (Rome, 14-37 a.d.) • scribes delayed introduction of printing press in Paris by 20 yrs (similar with calligraphers) • Luddites’ fallacy – destruction of 800 weaving and spinning machines • opposition to railroad, which then suppressed steam-powered carriages • how was the electric chair invented? • butter vs. margarine battle • Microsoft blocking of technology (Java, Netscape) – “embrace, extend, extinguish” Technology blocking Common facts: • why blocking? - creative destruction • opposition usually comes from workers but even high-tech firms engage in blocking • success depends on relative power of forces in conflict • rich countries even more prone to blocking – bigger stakes in question and strong government to provide assistance “Patent trolls” attacts on Blackberry and Ebay … Addi+onal readings The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics by William Easterly (Cambridge: MIT Press, 2001), Chapter 3 Wealth of Na:ons by Adam Smith, Introduc3on, Chapters 1-‐3, hUp://ebooks.adelaide.edu.au/s/smith/adam/s64w/ Against Intellectual Monopoly by Michele Boldrin and David Levin hUp://www.dklevine.com/general/intellectual/againsninal.htm
