宏观经济学原理-第五版-英文原版课件macro-ch12-presentation.ppt

1、 2009 South-Western,a part of Cengage Learning,all rights reservedC H A P T E RMacroeonomicsPremium PowerPoint Slides by Ron Cronovich12What are the facts about living standards and growth rates around the world?Why does productivity matter for living standards?What determines productivity and its g

2、rowth rate?How can public policy affect growth and living standards?1A typical family with all their possessions in the U.K.,an advanced economyGDP per capita:$35,580Life expectancy:79 yearsAdult literacy:99%A typical family with all their possessions in Mexico,a middle income countryGDP per capita:

3、$11,410Life expectancy:76 yearsAdult literacy:92%A typical family with all their possessions in Mali,a poor countryGDP per capita:$1,130Life expectancy:50 yearsAdult literacy:46%PRODUCTION AND GROWTH5GDP per capita,2005Growth rate,1960-2005China$6,5725.8%Singapore29,9215.4%Japan30,8213.8%Spain26,125

4、3.2%India3,4862.7%Israel25,6702.7%United States41,8542.2%Canada32,8862.1%Colombia7,7691.8%New Zealand22,5111.4%Philippines4,9201.4%Argentina14,4211.0%Saudi Arabia14,7290.8%Rwanda1,3330.3%Haiti1,8361.2%Incomes and Growth Around the WorldFACT 1:There are vast differences in living standards around the

5、 world.PRODUCTION AND GROWTH6GDP per capita,2005Growth rate,1960-2005China$6,5725.8%Singapore29,9215.4%Japan30,8213.8%Spain26,1253.2%India3,4862.7%Israel25,6702.7%United States41,8542.2%Canada32,8862.1%Colombia7,7691.8%New Zealand22,5111.4%Philippines4,9201.4%Argentina14,4211.0%Saudi Arabia14,7290.8

6、%Rwanda1,3330.3%Haiti1,8361.2%Incomes and Growth Around the WorldFACT 2:There is also great variation in growth rates across countries.PRODUCTION AND GROWTH7Incomes and Growth Around the WorldSince growth rates vary,the country rankings can change over time:Poor countries are not necessarily doomed

7、to poverty forever e.g.,Singapore,incomes were low in 1960 and are quite high now.Rich countries cant take their status for granted:They may be overtaken by poorer but faster-growing countries.PRODUCTION AND GROWTH8Incomes and Growth Around the WorldQuestions:Why are some countries richer than other

8、s?Why do some countries grow quickly while others seem stuck in a poverty trap?What policies may help raise growth rates and long-run living standards?PRODUCTION AND GROWTH9ProductivityRecall one of the Ten Principles from Chap.1:A countrys standard of living depends on its ability to produce g&s.Th

9、is ability depends on productivity,the average quantity of g&s produced per unit of labor input.Y=real GDP=quantity of output producedL=quantity of labor so productivity=Y/L(output per worker)PRODUCTION AND GROWTH10Why Productivity Is So ImportantWhen a nations workers are very productive,real GDP i

10、s large and incomes are high.When productivity grows rapidly,so do living standards.What,then,determines productivity and its growth rate?PRODUCTION AND GROWTH11Physical Capital Per WorkerRecall:The stock of equipment and structures used to produce g&s is called physical capital,denoted K.K/L=capita

11、l per worker.Productivity is higher when the average worker has more capital(machines,equipment,etc.).i.e.,an increase in K/L causes an increase in Y/L.PRODUCTION AND GROWTH12Human Capital Per WorkerHuman capital(H):the knowledge and skills workers acquire through education,training,and experience H

12、/L=the average workers human capitalProductivity is higher when the average worker has more human capital(education,skills,etc.).i.e.,an increase in H/L causes an increase in Y/L.PRODUCTION AND GROWTH13Natural Resources Per WorkerNatural resources(N):the inputs into production that nature provides,e

13、.g.,land,mineral depositsOther things equal,more N allows a country to produce more Y.In per-worker terms,an increase in N/L causes an increase in Y/L.Some countries are rich because they have abundant natural resources(e.g.,Saudi Arabia has lots of oil).But countries need not have much N to be rich

14、(e.g.,Japan imports the N it needs).PRODUCTION AND GROWTH14Technological KnowledgeTechnological knowledge:societys understanding of the best ways to produce g&sTechnological progress does not only mean a faster computer,a higher-definition TV,or a smaller cell phone.It means any advance in knowledge

15、 that boosts productivity(allows society to get more output from its resources).E.g.,Henry Ford and the assembly line.PRODUCTION AND GROWTH15Tech.Knowledge vs.Human CapitalTechnological knowledge refers to societys understanding of how to produce g&s.Human capital results from the effort people expe

16、nd to acquire this knowledge.Both are important for productivity.PRODUCTION AND GROWTH16The Production FunctionThe production function is a graph or equation showing the relation between output and inputs:Y =A F(L,K,H,N)F()a function that shows how inputs are combined to produce output “A”the level

17、of technology “A”multiplies the function F(),so improvements in technology(increases in“A”)allow more output(Y)to be produced from any given combination of inputs.PRODUCTION AND GROWTH17The Production FunctionThe production function has the property constant returns to scale:Changing all inputs by t

18、he same percentage causes output to change by that percentage.For example,Doubling all inputs(multiplying each by 2)causes output to double:Y =A F(L,K,H,N)2Y =A F(2L,2K,2H,2N)Increasing all inputs 10%(multiplying each by 1.1)causes output to increase by 10%:1.1Y =A F(1.1L,1.1K,1.1H,1.1N)PRODUCTION A

19、ND GROWTH18The Production FunctionIf we multiply each input by 1/L,then output is multiplied by 1/L:Y/L =A F(1,K/L,H/L,N/L)This equation shows that productivity(output per worker)depends on:the level of technology(A)physical capital per workerhuman capital per workernatural resources per workerY =A

20、F(L,K,H,N)Which of the following policies do you think would be most effective at boosting growth and living standards in a poor country over the long run?a.Offer tax incentives for investment by local firmsb.”by foreign firmsc.Give cash payments for good school attendanced.Crack down on govt corrup

21、tione.Restrict imports to protect domestic industriesf.Allow free tradeg.Give away condoms19PRODUCTION AND GROWTH20ECONOMIC GROWTH AND PUBLIC POLICYPRODUCTION AND GROWTH21Saving and InvestmentWe can boost productivity by increasing K,which requires investment.Since resources scarce,producing more ca

22、pital requires producing fewer consumption goods.Reducing consumption=increasing saving.This extra saving funds the production of investment goods.(More details in the next chapter.)Hence,a tradeoff between current and future consumption.PRODUCTION AND GROWTH22Diminishing Returns and the Catch-Up Ef

23、fectThe govt can implement policies that raise saving and investment.(Details in next chapter.)Then K will rise,causing productivity and living standards to rise.But this faster growth is temporary,due to diminishing returns to capital:As K rises,the extra output from an additional unit of K falls.P

24、RODUCTION AND GROWTH23Output per worker(productivity)The Production Function&Diminishing ReturnsK/LY/LCapital per workerIf workers have little K,giving them more increases their productivity a lot.If workers already have a lot of K,giving them more increases productivity fairly little.PRODUCTION AND

25、 GROWTH24the property whereby poor countries tend to grow more rapidly than rich ones The catch-up effect:K/LY/LPoor country starts hereRich country starts herePoor countrys growthRich countrys growthPRODUCTION AND GROWTH25Example of the Catch-Up EffectOver 1960-1990,the U.S.and S.Korea devoted a si

26、milar share of GDP to investment,so you might expect they would have similar growth performance.But growth was 6%in Korea and only 2%in the U.S.Explanation:the catch-up effect.In 1960,K/L was far smaller in Korea than in the U.S.,hence Korea grew faster.PRODUCTION AND GROWTH26Investment from AbroadT

27、o raise K/L and hence productivity,wages,and living standards,the govt can also encourageforeign direct investment:a capital investment(e.g.,factory)that is owned&operated by a foreign entityforeign portfolio investment:a capital investment financed with foreign money but operated by domestic reside

28、ntsSome of the returns from these investments flow back to the foreign countries that supplied the funds.PRODUCTION AND GROWTH27Investment from AbroadEspecially beneficial in poor countries that cannot generate enough saving to fund investment projects themselves.Also helps poor countries learn stat

29、e-of-the-art technologies developed in other countries.PRODUCTION AND GROWTH28EducationGovt can increase productivity by promoting educationinvestment in human capital(H).Public schools,subsidized loans for collegeEducation has significant effects:In the U.S.,each year of schooling raises a workers

30、wage by 10%.But investing in H also involves a tradeoff between the present&future:Spending a year in school requires sacrificing a years wages now to have higher wages later.PRODUCTION AND GROWTH29Health and NutritionHealth care expenditure is a type of investment in human capital healthier workers

31、 are more productive.In countries with significant malnourishment,raising workers caloric intake raises productivity:Over 1962-95,caloric consumption rose 44%in S.Korea,and economic growth was spectacular.Nobel winner Robert Fogel:30%of Great Britains growth from 1790-1980 was due to improved nutrit

32、ion.PRODUCTION AND GROWTH30Property Rights and Political StabilityRecall:Markets are usually a good way to organize economic activity.The price system allocates resources to their most efficient uses.This requires respect for property rights,the ability of people to exercise authority over the resou

33、rces they own.PRODUCTION AND GROWTH31Property Rights and Political StabilityIn many poor countries,the justice system doesnt work very well:Contracts arent always enforcedFraud,corruption often go unpunishedIn some,firms must bribe govt officials for permitsPolitical instability(e.g.,frequent coups)

34、creates uncertainty over whether property rights will be protected in the future.PRODUCTION AND GROWTH32Property Rights and Political StabilityWhen people fear their capital may be stolen by criminals or confiscated by a corrupt govt,there is less investment,including from abroad,and the economy fun

35、ctions less efficiently.Result:lower living standards.Economic stability,efficiency,and healthy growth require law enforcement,effective courts,a stable constitution,and honest govt officials.PRODUCTION AND GROWTH33Free TradeInward-oriented policies(e.g.,tariffs,limits on investment from abroad)aim

36、to raise living standards by avoiding interaction with other countries.Outward-oriented policies(e.g.,the elimination of restrictions on trade or foreign investment)promote integration with the world economy.PRODUCTION AND GROWTH34Free TradeRecall:Trade can make everyone better off.Trade has similar

37、 effects as discovering new technologies it improves productivity and living standards.Countries with inward-oriented policies have generally failed to create growth.E.g.,Argentina during the 20th century.Countries with outward-oriented policies have often succeeded.E.g.,South Korea,Singapore,Taiwan

38、 after 1960.PRODUCTION AND GROWTH35Research and DevelopmentTechnological progress is the main reason why living standards rise over the long run.One reason is that knowledge is a public good:Ideas can be shared freely,increasing the productivity of many.Policies to promote tech.progress:Patent lawsT

39、ax incentives or direct support for private sector R&DGrants for basic research at universitiesPRODUCTION AND GROWTH36Population Growthmay affect living standards in 3 different ways:1.Stretching natural resources200 years ago,Malthus argued that pop.growth would strain societys ability to provide f

40、or itself.Since then,the world population has increased sixfold.If Malthus was right,living standards would have fallen.Instead,theyve risen.Malthus failed to account for technological progress and productivity growth.PRODUCTION AND GROWTH37Population Growth2.Diluting the capital stock Bigger popula

41、tion=higher L=lower K/L =lower productivity&living standards.This applies to H as well as K:fast pop.growth=more children =greater strain on educational system.Countries with fast pop.growth tend to have lower educational attainment.PRODUCTION AND GROWTH38Population GrowthTo combat this,many develop

42、ing countries use policy to control population growth.Chinas one child per family lawsContraception education&availabilityPromote female literacy to raise opportunity cost of having babies2.Diluting the capital stock PRODUCTION AND GROWTH39Population Growth3.Promoting tech.progressMore people=more s

43、cientists,inventors,engineers=more frequent discoveries=faster tech.progress&economic growthEvidence from Michael Kremer:Over the course of human history,growth rates increased as the worlds population increasedmore populated regions grew faster than less populated onesList the determinants of produ

44、ctivity.List three policies that attempt to raise living standards by increasing one of the determinants of productivity.40Determinants of productivity:K/L,physical capital per worker H/L,human capital per workerN/L,natural resources per worker A,technological knowledgePolicies to boost productivity

45、:Encourage saving and investment,to raise K/LEncourage investment from abroad,to raise K/LProvide public education,to raise H/L41Determinants of productivity:K/L,physical capital per worker H/L,human capital per workerN/L,natural resources per worker A,technological knowledgePolicies to boost produc

46、tivity:Patent laws or grants,to increase AControl population growth,to increase K/L42PRODUCTION AND GROWTH43Are Natural Resources a Limit to Growth?Some argue that population growth is depleting the Earths non-renewable resources,and thus will limit growth in living standards.But technological progr

47、ess often yields ways to avoid these limits:Hybrid cars use less gas.Better insulation in homes reduces the energy required to heat or cool them.As a resource becomes scarcer,its market price rises,which increases the incentive to conserve it and develop alternatives.PRODUCTION AND GROWTH44CONCLUSIO

48、NIn the long run,living standards are determined by productivity.Policies that affect the determinants of productivity will therefore affect the next generations living standards.One of these determinants is saving and investment.In the next chapter,we will learn how saving and investment are determ

49、ined,and how policies can affect them.There are great differences across countries in living standards and growth rates.Productivity(output per unit of labor)is the main determinant of living standards in the long run.Productivity depends on physical and human capital per worker,natural resources pe

50、r worker,and technological knowledge.Growth in these factors especially technological progress causes growth in living standards over the long run.45Policies can affect the following,each of which has important effects on growth:Saving and investmentInternational tradeEducation,health&nutritionPrope