1. MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT The Wealth of Nations The Supply Side Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. PowerPoint by Beth Ingram University of Iowa

2. 3-2 Key Concepts GDP Growth Total output Output per capita Elements of Growth Labor Capital Total Factor Productivity

3. 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

4. 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

5. 3-5 Aggregate Real GDP

6. 3-6 Real per capita GDP

7. 3-7 Aggregate Real GDP

8. 3-8 Real per capita GDP

9. 3-9 Importance of Growth Growing population Life expectancy Improving standards of living Poverty reduction

10. 3-10 GDP per capita, US $$ Growth rate, 1980 – 2000 (per annum) Growth rate and Level of GDP

11. 3-11 GDP per capita, US $$ Growth rate, 1980 – 2000 (per annum) China India Points are weighted by size of population in 1980 Growth rate and Level of GDP

12. 3-12 Inequality and Growth Growth Rate More Inequality 

13. 3-13 Which enhances welfare? Eliminate business cycle movements Enhance growth rate

14. 3-14 1999 GDP per capita (US = $30600) Years to attain US 1999 levelActual growth rate (1990-99) 1% growth3% growth6% growth9% growth Germany $25350 20 years7 years4 years3 years1.5% UK $22640 32 years11 years6 years4 years2.1% Brazil $4420 196 years66 years34 years23 years1.7% China $780 370 years145 years64 years44 years9.8% Ethiopia $100 577 years194 years99 years67 years2.2% Compounding is a wonderful thing…

15. 3-15 Real GDP per capita, Top Ten PPP US $ Source: OECD, Author’s calculation

16. 3-16 Real GDP per capita, Bottom Ten PPP US $ Source: OECD, Author’s calculation

17. 3-17 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) Labor (Hours worked, number of workers) Labor (Hours worked, number of workers)

18. 3-18 GDP per capita GDP per capita = GDP Population Labor Productivity Average Hours Worked Employment Rate Labor Force Participation Rate Labor Force Participation Rate

19. 3-19 GDP per capita Labor productivity Average hours worked Employment rate = 1 – Unemployment Rate Labor force participation rate

20. 3-20 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

21. 3-21 Production Function Output = TFP  Capital Stock a  Labor Hours (1-a) Real GDP Total Factor Productivity A parameter (a number, 0 < a < 1)

22. 3-22 Cobb-Douglas example Real GDP Hours worked TFP = 1 Capital = 500 a=0.6

23. 3-23 Hours Worked Real GDP

24. 3-24 Capital Stock Output

25. 3-25 Implications for labor productivity Output = TFP  Capital Stock a  Labor Hours (1-a) Labor Productivity

26. 3-26 Changes in Labor Productivity Total Factor Productivity Capital per Labor Hour

27. 3-27 Capital Stock per labor hour Labor Productivity 5001000 8 12 Labor Productivity = TFP  (Capital Stock/Labor Hours) a

28. 3-28 Output Growth and

29. 3-29 Capital Stock per Labor Hour Labor Productivity k1k1 y1y1 y2y2 Output/Labor Hour = TFP  (Capital/Labor Hour) a Increase in TFP

30. 3-30 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

31. 3-31 Growth accounting for Japan, Germany, the UK, and the United States, 1913–1950.

32. 3-32 Growth accounting for Japan, Germany, the UK, and the United States, 1950–1973.

33. 3-33 Growth accounting for Japan, Germany, the UK, and the United States, 1973–1992.

34. 3-34 Europe and Asia Total Output:Of Which CapitalLaborTFP Golden Age 1950-73 France5.0%1.6%0.3%3.1% UK3.0%1.6%0.2%1.2% W. Germany6.0%2.2%0.5%3.3% Asian Miracle 1960-94 China6.8%2.3%1.9%2.6% Hong Kong7.3%2.8%2.1%2.4% Indonesia5.6%2.9%1.9%0.8% Korea8.3%4.3%2.5%1.5% Thailand7.5%3.7%2.0%1.8% Singapore8.5%4.4%2.2%1.5% Europe relied on capital and TFP – Asian countries have relied on capital

35. 3-35 Growth Accounting Japan Capital growth important through out Labor, TFP important ’50 – ’73 US TFP important until ’73 Labor important after ’73 UK and Germany rely less on labor

36. 3-36 Growth Accounting Asian Tigers, 1966 - 1990

37. 3-37 Growth accounting in emerging markets, 1960–1994.

38. 3-38 Summary Importance of Growth Sources of Growth GDP per capita Hourly productivity Number of hours worked Productivity Capital Accumulation TFP Growth Accounting Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.