Principles of Macroeconomics Day 4 - Malthus Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus2 Thomas Robert Malthus An Essay on the Principle of Population as it Affects the Future Improvement of Society (1798): An Essay on the Principle of Population as it Affects the Future Improvement of Society (1798): In this famous work, Malthus posited his hypothesis that (unchecked) population growth always exceeds the growth of means of subsistence due to the fixed land resources in the world. In this famous work, Malthus posited his hypothesis that (unchecked) population growth always exceeds the growth of means of subsistence due to the fixed land resources in the world. Malthus was a Classical Economist along with Adam Smith, David Hume and David Ricardo Malthus was a Classical Economist along with Adam Smith, David Hume and David Ricardo

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus3 Mathus’ Logic “Food is necessary to the existence of Man” “Food is necessary to the existence of Man” “The Passion between the sexes is necessary and will remain nearly in its present state” “The Passion between the sexes is necessary and will remain nearly in its present state” His conclusion: His conclusion: “The power of population is infinitely greater than the power in the earth to produce subsistence for man.” “The power of population is infinitely greater than the power in the earth to produce subsistence for man.”

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus4 Thomas Robert Malthus Malthus' hypothesis implied that actual population always has a tendency to push above the food supply due to arable land available. Malthus' hypothesis implied that actual population always has a tendency to push above the food supply due to arable land available. The only Check on population growth was “misery and vice.” The only Check on population growth was “misery and vice.”

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus5 Thomas Robert Malthus An English minister,

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus6 Thomas Robert Malthus Actual (checked) population growth is kept in line with food supply growth by "positive checks" (starvation, disease and the like, elevating the death rate) and "preventive checks" (i.e. postponement of marriage, etc. that keep down the birthrate), both of which are characterized by "misery and vice".

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus7 Where did Mathus go wrong? Growth in Human Ingenuity has offset the effects of a larger population growth. Growth in Human Ingenuity has offset the effects of a larger population growth. Pesticides, fertilizers, mechanized equipment, new crop varieties, and other technological advances. Pesticides, fertilizers, mechanized equipment, new crop varieties, and other technological advances. One of the resources for the above is N. Gregory Mankiw’s book, Principles of Macroeconomics, 2007 One of the resources for the above is N. Gregory Mankiw’s book, Principles of Macroeconomics, 2007

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus8 Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion. Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of $300 billion. Find public saving, taxes, private saving, national saving, and investment. Find public saving, taxes, private saving, national saving, and investment. A C T I V E L E A R N I N G 1 A. Calculations 8

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus9 Use the numbers from the preceding exercise, but suppose now that the government cuts taxes by $200 billion. Use the numbers from the preceding exercise, but suppose now that the government cuts taxes by $200 billion. In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment. In each of the following two scenarios, determine what happens to public saving, private saving, national saving, and investment. 1. Consumers save the full proceeds of the tax cut. 2. Consumers save 1/4 of the tax cut and spend the other 3/4. A C T I V E L E A R N I N G 1 B. How a tax cut affects saving 9

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus10 The two scenarios from this exercise were: 1.Consumers save the full proceeds of the tax cut. 2.Consumers save 1/4 of the tax cut and spend the other 3/4. Which of these two scenarios do you think is more realistic? Which of these two scenarios do you think is more realistic? Why is this question important? Why is this question important? A C T I V E L E A R N I N G 1 C. Discussion questions 10

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus11 SPACE

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus12

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus13 Given: Y = 10.0, C = 6.5, G = 2.0, G – T = 0.3 Public saving = T – G = – 0.3 Taxes: T = G – 0.3 = 1.7 Private saving = Y – T – C = 10 – 1.7 – 6.5 = 1.8 National saving = Y – C – G = 10 – 6.5 = 2 = 1.5 Investment = national saving = 1.5 A C T I V E L E A R N I N G 1 Answers, part A 13

April 8, 2010 Principles of Macroeconomics, Day 4 - Malthus14 In both scenarios, public saving falls by $200 billion, and the budget deficit rises from $300 billion to $500 billion. 1. If consumers save the full $200 billion, national saving is unchanged, so investment is unchanged. 2. If consumers save $50 billion and spend $150 billion, then national saving and investment each fall by $150 billion. A C T I V E L E A R N I N G 1 Answers, part B 14