1. Lecture 2. THE WORLD ECONOMY SINCE 1990
Economics 1490
THE WORLD ECONOMY:
GROWTH OR STAGNATION?
with
Professor Dale W. Jorgenson
Lecture 2. THE WORLD ECONOMY SINCE 1990
September 5, 2017
Harvard University Department of Economics
Fall 2017

2. THE WORLD ECONOMY:
GROWTH OR STAGNATION?
A. Comparing Economies
B. U.S. Crisis and Recovery
C. European Slowdown
D. Asian Economic Miracles
E. Sustainability of Economic Growth
F. World Economic Outlook

3. A. COMPARING ECONOMIES
1. Course Description
2. The World Economy since 1990
3. Purchasing Power Parities
4. Sources of Growth
5. Globalization and Competitiveness

4. PURCHASING POWER PARITIES
A purchasing power parity between two countries, A and B, is the ratio of the number of units of country A’s currency needed to purchase in country A the same quantity of a specific good or service as one unit of country B’s currency will purchase in country B. PPPs can be expressed in the currency of either of the countries. In practice, they are usually computed among large numbers of countries and expressed in terms of a single currency, with the U.S. dollar (US$) most commonly used as the base or “numeraire” currency.

5. INTERNATIONAL COMPARISON
PROGRAM
Originated in 1968; Available at Approximately 5-Year Intervals
Provides Purchasing Power Parities among Countries
The 2011 Version Includes 199 Countries and Combines Two Studies:
Eurostat/OECD: 47 Countries
World Bank: 152 Countries
Today We Consider Applications to Productivity Measurement; Later We Consider Applications to Poverty Measurement and Sustainability

6. AIM OF THE INTERNATIONAL
COMPARISON PROGRAM
FROM BIG MAC TO THE ICP
The aim of the ICP is to produce PPP’s that take into account the relative prices among many countries for a broad range of goods and services, including not only consumer products but also capital and government expenditures, which together make up the GDP.

7. IN TERMS OF PURCHASING POWER PARITIES
LARGEST ECONOMIES
IN TERMS OF PURCHASING POWER PARITIES
Twelve Largest Economies by Share of World GDP
*ICP 2011

8. THE SOURCES OF ECONOMIC GROWTH
Comparisons among Regions and Countries
Sources of Growth in Capital Input
Information Technology and Non-Information Technology
Labor Input and Labor Quality
Total Factor Productivity

9. MODEL OF PRODUCTION: Production Possibility Frontier.
where:
I - Investment
C – Consumption
K – Capital
L – Labor
A - Total Factor Productivity (TFP)

10. CAPITAL INPUT AND THE COST OF CAPITAL
PERPETUAL INVENTORY METHOD
where:
K - capital stock
I – investment
 - depreciation rate
RENTAL PRICE OF CAPITAL INPUT
  where:
  c - price of capital input
P - price of investment
r - rate of return
 - asset-specific inflation rate

11. SOURCES OF WORLD ECONOMIC GROWTH
Average annual growth rates, weighted by the income share.

12. FOUR TRENDS IN THE FRAGMENTATION OF TRADE
Trend 1: International Fragmentation of Production is Expanding.
Trend 2: More Value-Added from High-Skilled Labor and Capital.
Trend 3: Enhanced Specialization in High-Skilled Labor in High-Income Countries.
Trend 4: Enhanced Specialization in Capital in Emerging Economies.

13. SHARES IN WORLD GLOBAL VALUE CHAIN INCOMES
GVC Incomes in Advanced and Emerging Countries, All Manufactures, 1995–2011

14. ANNUAL CHANGE IN SHARES OF GVC INCOMES
GVC Incomes in Advanced and Emerging Countries, All Manufactures, 1995–2011

15. FRAGMENTATION OF TRADE
The Domestic Share of GVC Income Has Declined and the Global Share Has Increased.
Emerging Economies Have Increased Their Share of GVC Income, Relative to Advanced Economies.
The Share of Capital in GVC Income Has Increased Relative to the Share of Labor.
The Collapse of Trade in 2009, the Peak of the Crisis, Was Quickly Reversed in 2010.

16. TRANSFORMATION OF THE WORLD ECONOMY
Despite the Economic Turbulence of the Past Two Decades, the World Economy Is Entering a Period of Sustainable Growth at a Rate of almost 3.2 Percent Annually, Only Slightly below the Growth Rate of 3.3 Percent for the Past Quarter Century.
Relative Importance of the Major Emerging Economies, China and India, Will Continue to Increase, Even with Much Slower Growth in China and a Modest Slowdown in India. Growth Potential Will Increase Modestly in Both Japan and the U.S.
Upside Potential Growth of the World Economy Is Considerable, But Would Require Ambitious Domestic Reforms in the Major Emerging Economies that Appear Unlikely. Downside Risks Are for Continued Stagnation of Productivity Growth around the World.
Conclusion: The Base Case Projection of World Economy Is for Moderate but Sustained Growth and a Continuing Shift from the Advanced Economies of the G7 to the Major Emerging Economies. This Has Established the New World Order of the 21st Century.

17. E. SUSTAINABILITY OF ECONOMIC GROWTH
21. Demographic Projections 
22. Investing in Human Capital
23. Fiscal Sustainability
24. Environmental Sustainability
25. Ending Extreme Poverty 

18. DEMOGRAPHIC PROJECTIONS

19. INVESTING IN HUMAN CAPITAL

20. FISCAL SUSTAINABILITY

21. ENVIRONMENTAL SUSTAINABILITY

22. ENDING EXTREME POVERTY

23. PROJECTING THE GROWTH OF THE WORLD ECONOMY
Future Demography: Population Projections for the World Economy Are Available from the United Nations. Labor Input Growth Includes the Growth of the Labor Force and Changes in Labor Quality Due to Age, Gender, and Educational Attainment.
Future Productivity: Productivity Projections for the World Economy Are Available from The Conference Board in New York. These Are Based on Future Trends in the Development of Information Technology and Non-Information Technology.
We Derive Output and Capital Input Projections from Future Trends in Demography and Productivity. Future Productivity Growth Is the Main Source of the Substantial Uncertainty in Projections of the Growth of the World Economy.

24. LABOR PRODUCTIVITY GROWTH
SOURCES OF AVERAGE
LABOR PRODUCTIVITY GROWTH
where:
  y = Y/H - Output per Hour Worked (ALP).
  k = K/H - Capital Input per Hour Worked.
CAPITAL DEEPENING: growth of capital input per hour worked, weighted by the share of capital.
LABOR QUALITY GROWTH: growth of labor input per hour worked, weighted by the share of labor.
TOTAL FACTOR PRODUCTIVITY.

25. RANGE OF WORLD OUTPUT PROJECTIONS

26. OUTLOOK FOR THE WORLD ECONOMY
The Growth of the World Economy Has Accelerated since and This Acceleration Will Continue for
Average Labor Productivity Growth for the World Economy in Will Slow Relative to
Growth of Hours Worked for the World Economy in Will Accelerate Relative to
Future World Economic Growth Will Be Subject to Substantial Uncertainty.